Habib Bank AG Zurich · Mohammad Ali Hussain 1954 Kenyan Country Manager Kenya. 7 Habib Bank AG...

Habib Bank AG Zurich

Annual Report 2016

1


Table of contents

Group key figures 2Letter from the Chairman and the President 4Habib Bank AG Zurich - the Group 5Group organisation structure 6Directors' report 8

Group financial statements Balance sheet 12 Income statement 14 Cashflow statement 16 Statement of changes in equity 18 Notes to the consolidated financial statements 20 Report of the Statutory Auditor 52

Bank financial statements Balance sheet 54 Income statement 56 Statement of changes in equity 58 Appropriation of profit / coverage of losses / other distributions 73 Report of the Statutory Auditor 74

Addresses 75

2


GROUP

Group key figures*

in CHF million 31.12.12 31.12.13 31.12.14 31.12.15 31.12.16

Balance sheet

Total assets 7'850 7'772 9'804 10'583 11'449

Shareholder's equity1 877 873 987 1'000 1'047

Advances 2'351 2'871 3'408 3'195 3'319

Deposits 6'289 6'398 8'018 8'696 9'314

Income statement

Total income2 286.4 253.9 418.9 397.2 374.3

Operating expenses 159.9 175.1 178.3 194.0 204.5

Operating result 69.9 55.1 207.8 148.2 123.1

Group profit / loss 40.4 28.6 77.6 88.2 92.4

0

2000

4000

6000

8000

10000

12000

20162015201420132012

7'850 7'772

9'80410'583

11'449

Total assets, in CHF million

0

200

400

600

800

1000

1200

20162015201420132012

877 873987 1'000 1'047

Shareholder's equity 1, in CHF million

0

500

1000

1500

2000

2500

3000

3500

20162015201420132012

2'351

2'871

3'408 3'195 3'319

Advances, in CHF million

0

2000

4000

6000

8000

10000

20162015201420132012

6'289 6'398

8'018 8'696

9'314

Deposits, in CHF million

0

100

200

300

400

500

20162015201420132012

286.4253.9

418.9 397.2 374.3

Total income2, in CHF million

0

50

100

150

200

250

20162015201420132012

159.9175.1 178.3

194.0 204.5

Operating expenses, in CHF million

0

50

100

150

200

250

20162015201420132012

69.955.1

207.8

148.2123.1

Operating result, in CHF million

0

20

40

60

80

100

20162015201420132012

40.4

28.6

77.688.2 92.4

Group profit / loss, in CHF million

* Effective 1 January 2013, the Group adopted the new accounting principles in accordance of FINMA Circular 2015/1 "Accounting - Banks"

1ExcludingminorityinterestinequityandinGroupprofit/loss

2 Including "Gross result from interest operations", "Result from comission business and services", "Result from trading activities and the fair value option" and "Other result from ordinary activities"

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GROUP

31.12.12 31.12.13 31.12.14 31.12.15 31.12.16

Key figures and ratios

Numberofoffices 219 253 278 315 346

Number of employees 3'823 4'140 4'456 4'779 5'073

Return on equity (ROE) (%)1 4.0% 2.8% 7.0% 7.3% 7.3%

Equity ratio (%) 12.7% 13.1% 12.3% 11.6% 11.3%

Cost / income ratio (%) 55.8% 69.0% 42.6% 48.8% 54.6%

Capital ratio (%)2 21.8% 21.0% 19.5% 19.9% 19.7%

0

50

100

150

200

250

300

350

20162015201420132012

219253

278315

346

Number of offices

0

1000

2000

3000

4000

5000

6000

20162015201420132012

3'8234'140

4'4564'779

5'073

Number of employees

0

1

2

3

4

5

6

7

8

20162015201420132012

4.0%

2.8%

7.0% 7.3% 7.3%

Return on equity (ROE) (%)1

0

3

6

9

12

15

20162015201420132012

12.7% 13.1%12.3%

11.6% 11.3%

Equity ratio (%)

0

10

20

30

40

50

60

70

80

20162015201420132012

55.8%

69.0%

42.6%48.8%

54.6%

Cost / income ratio (%)

0

5

10

15

20

25

20162015201420132012

21.8% 21.0%19.5% 19.9% 19.7%

Capital ratio (%)2

1 Groupprofit/lossaspercentageofaverageequityatyearend2 Since 1 January 2013, capital adequacy has been determined in accordance with the standards in the "Basel III Accord"

4


Letter from the Chairman and the President

It is our pleasure to present you with the 49th annual report of Habib Bank AG Zurich based on the accounting principles issued by the Swiss Financial Market Supervisory Authority.

By the grace of God, Habib Bank AG Zurich delivered good results in 2016 while maintaining a strong capital base and high liquidity. The Group maintained its conservative lending policy, with a high degree of disci-pline. This policy is characterized by a high percentage of fully secured and relatively short-term lending. As a result, advances to clients decreased to 36% of deposits received from clients. The remaining liquidity was placed in the interbank market or invested in investment grade bonds.

The Board of Directors has proposed that out of the profit for the year ended 31 December 2016 and a carry-over profit from last year adding up to a distributable amount of CHF 37'210'449.– the following appropria-tions should be made

- Allocation to statutory retained earnings reserves CHF 1'700'000.–- Allocation to voluntary retained earnings reserves CHF 17'500'000.–- Distribution of dividend from distributable profit CHF 18'000'000.–- Profit and loss carried forward CHF 10'449.–

We would like to thank our clients for their loyalty to Habib Bank AG Zurich and for the trust they placed in us in 2016. We also wish to thank all our employees for their ongoing commitment and contribution to the success of Habib Bank AG Zurich.

Dr. Andreas Länzlinger Muhammad H. HabibChairman of the Board of Directors President

5


Habib Bank AG Zurich - the Group

Habib Bank AG Zurich (hereinafter "the Bank") was incorporated in Switzerland in 1967 and is privately owned.

The Habib family has been actively involved in banking for over 75 years. Two family members, Mr. Muhammad H. Habib, President, and Mr. Mohamedali R. Habib, Group CEO, are members of the General Management. Other members of the family are currently working their way up through the management grades.

The Bank has its Head Office and operation in Zurich and branches in the United Arab Emirates and Kenya. The Bank holds four wholly owned subsidiaries: Habib Bank Zurich Plc, United Kingdom, Habib Canadian Bank, Canada, HBZ Bank Limited, South Africa and HBZ Services FZ-LLC, United Arab Emirates. The Bank holds a 51% ownership interest in Habib Metropolitan Bank Ltd., Pakistan and Habib Bank Zurich (Hong Kong) Ltd., Hong Kong (collectively "the Group").

The traditional values of the Group are: trust, integrity, respect, responsibility, commitment and teamwork.

The Bank and the Group are subject to the consolidated supervision of the Swiss Financial Market Supervisory Authority (FINMA). The Group has a strong capital base and liquidity ratios above industry standards. Furthermore, the Group has close co-operation with the various regulatory bodies and central banks in the countries in which the Group operates.

The Group places a high emphasis on personal service in the countries in which it operates. The branches and subsidiaries cover eight countries spread over four continents. As of the end of 2016, 5'073 employees spread over 346 offices are strategically situated to provide maximum assistance to our local and international clien-tele. The Group is active in commercial banking, retail banking, trade finance business, wealth management and Islamic banking.

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GROUP

Board of Directors

The Board of Directors of the Bank is made up of non-executive and independent directors, all of whom have extensive experience in their respective field of competence.

Name Born Citizenship Board of Directors Audit CommitteeRisk & Control Committee

Dr. Andreas Länzlinger 1959 Swiss Chairman

Urs W. Seiler 1949 Swiss Vice Chairman Member Member

Ray Barnes 1945 British Member Member

Dr. Marco Duss 1943 Swiss Member Chairman

Ursula Suter 1954 Swiss Member Chairwoman

Dr. Stephan Thaler 1962 Swiss Member Member

General Management

General Management consists of two members of the Habib family and three non-family members. The majority of the members of General Management have residency in Switzerland.

Name Born Citizenship FunctionMuhammad H. Habib 1959 Swiss President

Mohamedali R. Habib 1964 Canadian Group CEO

Rajat Garg 1963 Singaporean Member of General Management and Head of Developed Markets

Anjum Iqbal 1952 British Member of General Management and Head of Emerging Markets

Walter Mathis 1961 Swiss Member of General Management and Head of Shared Services

Group organisation structure

Management of the branch network

Name Born Citizenship Function CountryChristian Lerch 1959 Swiss Country Manager Switzerland

Awais Hassan 1966 Pakistani Country Manager United Arab Emirates

Mohammad Ali Hussain 1954 Kenyan Country Manager Kenya

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GROUP

Management of the subsidiaries

Name Born Citizenship Function Country

Muslim Hassan 1955 Canadian Chief Executive Officer Canada

Zafar Khan 1952 South African Chief Executive Officer South Africa

Atif Mufti 1973 Pakistani Chief Executive Officer United Arab Emirates*

Sirajuddin Aziz 1956 Pakistani Chief Executive Officer Pakistan

Ikram Quraishi 1948 USA Chief Executive Officer Hong Kong

Satyajeet Roy 1967 British Chief Executive Officer United Kingdom

* HBZ Services FZ-LLC

Group Internal Audit

Name Born Citizenship FunctionHaroon Ahmad 1975 Pakistani Head of Group Internal Audit

Group Support Functions

Name Born Citizenship FunctionHaja Alavudeen 1966 Indian Head of Group Information & Technology Risk

Umair Chaudhary 1968 British Group Chief Operating Officer

Adnan Fasih 1967 Pakistani Head of Group Islamic Banking

Felix Gasser 1959 Swiss Head of Group Risk Control

Dr. Sitwat Husain 1964 Pakistani Head of Group Human Resources

Arif Lakhani 1945 Pakistani Head of Group Wealth Management

Dr. Pascal Mang 1964 Swiss Head of Group Legal & Compliance

Alfred Merz 1962 Swiss Head of Group Financial Control

Atif Mufti 1973 Pakistani Head of Group Operations

Syam Pillai 1962 Indian Head of Group Information Technology

Sibel Sanus 1954 Turkish Head of Group Financial Institutions

Ralph Schneider 1964 Swiss Head of Group Credit

8


GROUP

Directors' report

Economic environment

The world economy expanded at a moderate pace in 2016 although momentum accelerated during the second half of the year as the global manufac-turing cycle turned up. Commodity prices including oil bottomed early in the year, removing a signifi-cant drag on global growth and helping to stabilize activity in many commodity-exporting eco nomies. Similarly the downtrend in inflation subsided. Global monetary policy remained broadly accom-modative, though the US Fed continued its gradual rate normalization with one more rate increase in December, while the Bank of Japan refrained from adding additional monetary stimulus. While the ECB extended its asset purchase program, it did so at a reduced rate. Currency markets were dominated by two major political events; the UK's vote to leave the EU and the win of Donald Trump in the US presidential election. Expectations of the difficult exit process drove the British pound to a multi- decade low, while anticipation of stronger US growth under the new president propelled the USD to the highest level since 2002 on a trade-weighted basis.

Pakistan experienced the best growth performance among the Bank's largest markets as the economy grew at close to 5%. The main drivers of growth were large scale investment activity in the context of the China-Pakistan Economic Corridor (CPEC). Under the USD 50 billion project, massive spending is improving Pakistan's infrastructure and removing bottlenecks in energy production and distribution as well as transport. The State Bank of Pakistan maintained its pro-growth stance with another rate cut taking the policy rate to a new all-time low. The country successfully exited the IMF stand-by program and the government vowed to continue the general lines of the reform agenda. The current account deficit remained contained despite higher oil prices and lower growth of overseas remittances. The currency was broadly unchanged against the USD which supported the external accounts but continued to weigh on the country's export sectors.

The rebound in global oil prices greatly helped to stabilize activity in the United Arab Emirates over the course of the year. Nevertheless overall growth fell to the lowest level since 2010. The non-oil sec-tor continued to struggle with soft demand for real estate and reduced public spending. Moreover the currency-peg against the USD pushed interest rates higher and the cost of funding, further dampening the property market. Prospects brightened considerably late in the year when the country's activity indicators showed a broad-based improvement of output and new orders.

In 2016 South Africa recorded the lowest rate of real economic growth since the Great Financial Crisis and barely escaped a recession. At the same time, the weak Rand and structural bottlenecks pushed inflation to the highest level since 2009, forcing the Reserve Bank to tighten its monetary policy twice during the first quarter. Weak growth also led to a further slowdown of private sector credit. The rebound of commodity prices at last improved the fortunes of the long-suffering mining sector. The general governance issues, however, remained largely unaddressed, which contributed to depressed business confidence and low productivity growth. Despite the weak economic performance and the lack of urgent reforms, the country was able to maintain the investment-grade status from the world's leading rating agencies due to its commitment to long-term fiscal consolidation.

Two developments framed events in the UK during the past twelve months: the decision to leave the EU in the referendum of 23 June, most likely to take place by 2019, and the resilience of the economy to this largely unexpected shock. Other than the fact that the UK remains a full member of the EU for the time being, the sharp depreciation of the British pound was a key factor for the better economic out-come as it provided an important lift to the external sector. The economy also received welcome support from the Bank of England which cut its base rate to 0.25% in August and increased asset purchases. The change at the helm of the government in the wake

9


GROUP

of the Brexit vote triggered important adjustments in public policy, including reduced fiscal austerity, although their impact will only be felt in the coming years.

Swiss economic performance improved in 2016 thanks to increased industrial output and strong export growth following the exchange rate shock suffered during the previous year. Better growth in the eurozone also contributed to increased activity levels. Unemployment, however, trended higher as companies continued to adjust to the higher exter-nal value of the Swiss Franc. The Swiss National Bank kept its negative interest rate policy in place and continued to intervene in the currency market to prevent further upward pressure on the currency.

Annual growth accelerated to close to 6% in Kenya. All key sectors contributed to the expansion, includ-ing agriculture which represents some 30% of GDP and benefited from strong demand for tea and coffee as well as horticultural products. The introduction of an interest rate corridor in August slowed credit growth markedly, but an easing of inflationary pres-sures allowed the Central Bank of Kenya to cut its policy interest rates twice.

The continued structural slowdown of the Chinese economy represented a major drag on the Hong Kong economy for another year. The currency peg to the US dollar meant moreover that local interest rates rose creating another headwind for the impor-tant real estate sector already affected by growing supply. The strong Hong Kong dollar which appreci-ated against most Asian currency depressed tourism and the retail sector.

Canada's economy rebounded strongly from the Fort McMurray wildfires which crippled growth dur-ing the second quarter. As a result, annual growth improved to a still lowly 1.3%. Equally low levels of inflation allowed the Bank of Canada to maintain its very accommodative monetary policy. The currency depreciated sharply early in the year but then started to recover in tandem with rising commodity prices.

Banking sector

Banks faced another challenging year, caught bet-ween the still low levels of interest rates in most economies and mounting regulatory requirements. The continued normalization of US monetary policy, lifted at least short-term US dollar lending rates with USD LIBOR rates reaching the highest level since 2009. Meanwhile, Capital market rates were volatile throughout the year as USD 10-year rates fell to a historical low in July only to spike sharply in the wake of the US presidential election.

The moderate global economic growth entailed also only moderate overall expansion of credit although there were important regional differences. In the Bank's portfolio of markets, credit demand remained muted in economies affected by the recent decline in commodity prices such as the UAE and South Africa. Lending progressed at healthy rates in most other countries and in Pakistan private-sector loans outstanding expanded at the fastest pace since 2008. A notable exception was Kenya where the intro-duction of an interest rate corridor reduced activity sharply for some market segments. Generally, the USD commercial and private lending business ben-efited from rising rates during the course of the year.

10


GROUP

Operational performance and outlook

Income statement

In 2016, the Group achieved a profit of CHF 92.4 mil-lion, which represents an increase of CHF 4.2 mil-lion compared to 2015. The development of average foreign exchange rates applied for the consolidated income statement for 2016 against 2015 was not a significant factor in 2016.

"Gross result from interest operations" decreased by CHF 23.1 million (8.8%) compared to 2015. The de-crease was mainly driven by lower interest rate levels in various countries, whereas the interest income from financial investments decreased by more than 10%.

"Changes in value adjustments for default risks and losses from interest operations" of CHF 40.6 million were 32% higher than 2015. The increase was driven by individual value adjustments requirements for im-paired loans. The "Gross debt amount for impaired loans / receivables" of CHF 396.1 million increased by 14%. Out of the amount of outstanding impaired loans, 96% were covered either by collaterals (at esti-mated liquidation value) or by individual value adjust-ments - totalling CHF 258.8 million (see page 29) in 2016.

Reported "Operating expenses" of CHF 204.5 million were CHF 10.5 million (5.4%) higher than in 2015. The main reasons for this increase were:

• "Personnel expenses" of CHF 137.5 million increased by CHF 6.5 million compared to 2015, represent- ing salary increments for existing employees and the growth of the average number of employees in 2016. The average number of employees in 2016 was 4'926 compared to 4'618 in 2015.

•The Groups expansion of its branch network is the main reason for higher costs for "General and administrative expenses" of CHF 67.0 million. While savings have been achieved in many areas, the largest increase is related to "Office space

expenses", with CHF 1.7 million (9.8%). In addition, improvements in the Group's IT infrastructure and IT security led to higher "Expenses for information technology and telecommunications" of CHF 1.5 million (16.8%) (see page 50).

In 2016, the Group released reserves of CHF 20.6 mil-lion under "Changes in reserves for general banking risks". This release was to partially offset the crea-tion of respective reserves created in 2014 of a total of CHF 76.6 million, of which CHF 46.6 million were re-lated to revaluation reserves on fair value investments.

The decrease of "Taxes" from CHF 61.4 million in 2015 to CHF 52.9 million 2016 was driven by the lowerlevelofGroupprofits,representinga43%ave-rage tax rate compared to operating result of CHF 123.1 million.

Balance sheet

The balance sheet reached CHF 11'449 million, which represents an increase of CHF 866 million or 8.2% compared to 2015. In the same manner as 2015, this increase was mainly driven by an increase in additional deposits.

"Liquid assets" reached CHF 1'301 million in 2016 compared to CHF 1'043 million in 2015. The increase of CHF 258 million (24.8%) was mainly related to higher balances with central banks in countries in which the Group is active.

At the end of December 2016, total loans increased by CHF 123.5 million (3.9%) compared to 2015 (see note 2). Within this development, loans with "Mortgage coverage" went up by CHF 138.9 million (11.2%) in various countries.

Credit exposure from instruments at fair value and investment activities (total of "Other financial instruments at fair value" and "Financial invest-ments") went up by CHF 522 million (14.6%) to CHF 4'099 million. About 98.6% of this total is invested in debt instruments, of which about 82%

11


GROUP

are sovereign counterparties of countries where the Group is active.

"Amount due in respect of customer deposits" in-creased by CHF 618.6 million (7.1%) compared to end of 2015, based on increases in most markets.

Capital and liquidity

The Group has a strong capital base and adequate liquidity ratio.

The capital adequacy ratio is at Bank level 26.6% and at Group level 19.7%. The liquidity coverage ratio (LCR) decreased to 118% at Bank level and 112% at Group level (for further detail please see the annual Basel III Year 2016 disclosure, www.habibbank.com/Group Financials).

Risk assessment

The Board of Directors conducted a risk assessment of major risk exposures of the Bank and the Group in 2016.

Operations

During 2016, the Group expanded its network with new branches in Canada, Pakistan and South Africa. In the United Kingdom, the Group transformed a branch into a subsidiary (Habib Bank Zurich Plc). In 2016, the Group ceased business operations of its subsidiary Habib European Bank Ltd, Isle of Man. The Group's Swiss operation continues to focus on strengthening its offerings to small and medium en-terprises in Switzerland and to expanding its wealth management capabilities.

In April 2016, a new organisational structure for General Management was implemented. General Management strengthened its management team with two additional members.

Outlook

The Group has made significant progress with the first and second phases (now focused on product offerings, client centricity and market expansion) of the Strategic Plan 2013-2020. The goal is to further expand the present branch network and the Group is currently evaluating options to further expand the franchise to new territories.

In 2017, Habib Bank AG Zurich celebrates its 50th

anniversary. This historic golden jubilee serves as a reminderofthefirm'slong-standingcommitmentinthe global banking sector. The Bank was founded in Zurich in 1967. With a widespread network of branches and subsidiaries across the globe, Habib Bank AG Zurich has consistently performed a specialized role in the international banking sector. The Group intends to celebrate this significant milestone in2017 with clients and employees.

The Group shall continue to address evolving client demands by investing in new technologies. Notwith-standing the technological landscape, personal com-munication shall endure as the foundation for the Bank's relationships with its valued clientele.

The Group expects 2017 to be a challenging year for the financial industry but is well positioned to ad-dress these challenges with clear focus, international presence, strong reputation and client loyalty.

12


GROUP

in CHF 000's Note 31.12.16 31.12.15

Assets

Liquid assets 1'300'845 1'042'715

Amounts due from banks 2'350'594 2'470'380

Amounts due from securities financing transactions 1 6'238

Amounts due from customers 2 2'736'903 2'774'605

Mortgage loans 2 581'972 420'757

Trading portfolio assets 3 143 98

Positive replacement values of derivative financial instruments 4 10'340 8'092

Other financial instruments at fair value 3 2'781'867 2'437'957

Financial investments 6/7 1'316'772 1'139'177

Accrued income and prepaid expenses 196'107 123'623

Non-consolidated participations 9 88 88

Tangible fixed assets 10 87'975 86'936

Intangible assets 11 1'713 3'428

Other assets 12 77'672 74'783

Total assets 11'449'229 10'582'638

Balance sheet (before appropriation)

13


GROUP

in CHF 000's Note 31.12.16 31.12.15

Liabilities

Amounts due to banks 427'581 381'948

Liabilities from securities financing transactions 1 132'764 72'946

Amounts due in respect of customer deposits 9'314'314 8'695'754

Negative replacement values of derivative financial instruments 4 10'918 10'918

Accrued expenses and deferred income 231'346 142'945

Other liabilities 12 33'388 35'333

Provisions 15 6'815 17'991

Reserves for general banking risks 15 545'708 556'136

Bank's capital 150'000 150'000

Retained earnings reserves 286'015 255'186

Currency translation reserves 2'038 -13'073

Minority interest in equity 215'909 188'327

Group profit / loss 92'433 88'228

- of which minority interests in group profit / loss 29'224 36'408

Total liabilities 11'449'229 10'582'638

Off balance sheet transactions

Contingent liabilities 22 1'382'463 1'182'316

Irrevocable commitments 1'380 1'596

Credit commitments 23 175'762 212'407

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GROUP

Income statement

in CHF 000's Note 2016 2015

Result from interest operations

Interest and discount income 227'877 225'877

Interest and dividend income from financial investments 246'020 274'958

Interest expense -234'320 -238'121

Gross result from interest operations 239'577 262'714

Changes in value adjustments for default risks and losses from interest operations -40'579 -30'828

Subtotal net result from interest operations 198'998 231'886

Result from commission business and services

Commission income from securities trading and investment activities 5'893 5'810

Commission income from lending activities 28'469 30'240

Commission income from other services 47'505 46'151

Commission expense -5'542 -5'565

Subtotal result from commission business and services 76'325 76'636

Result from trading activities and the fair value option 25 57'259 56'797

Other result from ordinary activities

Result from the disposal of financial investments 33 -1

Result from real estate 690 1'095

Other ordinary income 446

Subtotal other result from ordinary activities 1'169 1'094

15


GROUP

in CHF 000's Note 2016 2015

Operating expenses

Personnel expenses 26 -137'523 -130'993

General and administrative expenses 27 -66'960 -63'012

Subtotal operating expenses -204'483 -194'005

Value adjustments on participations, depreciation and amortisation on tangible fixed and intangible assets -13'946 -12'336 Changes to provisions and other value adjustments, and losses 7'761 -11'896

Operating result 123'083 148'176

Extraordinary income 28 1'574 612

Extraordinary expenses 28 -82

Changes in reserves for general banking risks 20'643 934

Taxes 30 -52'867 -61'412

Group profit / loss 92'433 88'228

- of which minority interests in group profit / loss 29'224 36'408

16


GROUP

Cashflow statement

2016 2015

in CHF 000'sSource

of fundsUse

of fundsSource

of fundsUse

of fundsCash flow from operating activities 279'072 167'024 157'279 87'339Group profit for the period 92'433 88'228Change in reserves for general banking risks 20'643 934Value adjustments on participation depreciations and amortisation on tangible fixed assets and intangible assets 13'946 12'336Provisions and other value adjustments 514 11'690 11'896 16'084Changes in value adjustments for default risks and losses 57'935 33'752 30'828Currency translation reserves 25'843 28'658Accrued income and prepaid expenses 72'484 344Accrued expenses and deferred income 88'401 13'991Previous year's dividend 28'455 41'319

Cash flow from shareholders' equity transaction

Bank's capital

Recognised in reserves

Cash flow from transactions in respect of participations, tangible fixed assets and intangible assets 2'439 14'816 2'853 8'816Non-consolidated participations

Real estate 2'346 3'810 1'824 2'735Other tangible fixed assets 93 11'006 1'029 6'081Intangible assets

17


GROUP

2016 2015

in CHF 000'sSource

of fundsUse

of fundsSource

of fundsUse

of fundsCash flow from the banking operations

Medium to long-term business (> 1 year) 36'080 629'542 444'805 177'990

Amounts due to banks 14'586

Amounts due in respect of customer deposits 705 12'312

Other liabilities 1'945 218

Amounts due from banks 17

Amounts due from customers 117'088 46'662 139'263

Mortgage loans 36'080 21'816 1'427

Other financial instruments at fair value 336'212

Financial investments 506'897 27'584

Other assets 2'889 22'714

Short-term business 1'304'667 552'746 1'074'854 1'303'948


Liabilities from securities financing transactions 59'818 72'946

Amounts due in respect of customer deposits 619'265 665'614

Negative replacement values for derivative financial instruments 10'720

Amounts due from banks 119'803 409'320

Amounts due from securities financing transactions 6'238 18'767

Amounts due from customers 130'846 278'103

Mortgages loans 197'528 7'153

Trading portfolio assets 45 609

Positive replacement values for derivative financial instruments 2'248 12'524

Other financial instruments at fair value 343'910 817'396


Currency differences 2'777 17'709

Liquidity 258'130 101'698

Liquid assets 258'130 101'698

Total 1'622'258 1'622'258 1'679'791 1'679'791

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GROUP

Statement of changes in equity

in CHF 000'sBank's capital

Retained earnings reserves

Reserves for general

banking risks

Currency translation

reserves

Minority interest

in equity

Groupprofit

or loss Total

Equity at 01.01.16 150'000 255'186 556'136 -13'073 188'327 88'228 1'224'804

Transfer of profits to retained earnings 51'820 36'408 -88'228

Capital increase / decrease

Currency translation differences 15'111 10'732 25'843

Dividends and other distributions -18'000 -10'455 -28'455

Other allocations to (transfers from) the reserves for general banking risks -10'428 -10'215 -20'643

Other allocations to (transfers from) other reserves -2'991 1'112 -1'879Group profit / loss 92'433 92'433

Equity at 31.12.16 150'000 286'015 545'708 2'038 215'909 92'433 1'292'103

19


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"Picture to come later"

Adelboden (Switzerland)

20


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Accounting and valuation principles

The Habib Bank AG Zurich Group's annual financial statements have been drawn up in accordance with the accounting rules incorporated into the Swiss Banking Act and its accompanying ordinance, together with FINMA Circular 2015/1 "Accounting - Banks".

These accounts, which are based on the following consolidation and accounting policies, give a true and fair view of the Bank's and the Group's assets, of its financial position and of the results of its operations.

Consolidation principles

Scope of the consolidationThe Group accounts incorporate the annual financial statements of Habib Bank AG Zurich, Zurich and its subsidiaries. Refer to note 8 for a list of consolidated subsidiaries.

Method of consolidationThe Group's capital consolidation follows the pur-chase method.

The interest in equity and profit or loss attributable to minority shareholders are disclosed separately. Intra-group assets and liabilities as well as expenses and income from intra-group transactions are eliminated.

Consolidation periodThe consolidation period for all Group companies is the calendar year. The closing date for the consoli-dated financial statements is 31 December.

Foreign currency translation

In the financial statements of individual Group compa-nies and branches, income and expenditure in foreign currencies are translated at the exchange rate ruling as at the transaction date. Amounts due from and due to third parties in foreign currencies are translated at the year-end rate. Gains and losses arising from currency translations into the local currencies are charged to the income statement as income from

Notes to the consolidated financial statements

"Result from trading activities and the fair value option".

For consolidation purposes, the balance sheets of the financial statements of branches and subsidiaries based outside Switzerland are translated into CHF at exchange rates prevailing at the Group report-ing date. The corresponding income statements are translated at the average rates of the respective year. Foreign exchange differences arising from the trans-lation of the financial statements of subsidiaries are recorded within the equity, whereas those from the translation of financial statements of branches are recorded in the income statement as "Result from trading activities and the fair value option".

The following exchange rates of the major currencies were used for the balance sheet: 31.12.16 31.12.151 USD 1.03 0.991 GBP 1.26 1.47100 AED 27.93 26.97100 PKR 0.98 0.94100 ZAR 7.46 6.45

The following exchange rates of the major currencies were used for the income statement: 31.12.16 31.12.151 USD 0.99 0.971 GBP 1.34 1.48100 AED 26.94 26.29100 PKR 0.94 0.94100 ZAR 6.74 7.58 Valuation and accounting principles

The valuation and accounting principles are consis-tent for the Bank and the Group.

Thefinancialstatementsofallgroupcompaniesusedfor consolidation comply with the below valuation and accounting principles.

21


GROUP

Recording of transactions

Transactions are recorded at the transaction date. Prior to the value date, forward foreign exchange and precious metal transactions are carried as off-balance-sheet business. Receivables and payables are disc-losed according to the domicile or residency of clients.

Liquid assets and amounts due to and from banks and amounts due in respect of customer deposits

These amounts, including interest due but not paid, are shown at nominal value.

Amounts due from and liabilities from securities financing transactions

The Group buys and sells securities under agree-ments to resell or repurchase substantially identical securities. Such agreements do not normally con-stitute economic sales and are therefore treated as financingtransactions.Securitiessoldsubjecttosuchagreements continue to be recognised in the balance sheet. The proceeds from the sale of these securities are treated as liabilities. Securities purchased under agreements to re-sell are recognised as loans colla-teralised by securities, or as cash deposits against which the Group's securities are pledged.

Amounts due from customers and mortgage loans

These claims are reported at nominal value. All client loans are assessed individually for default risks and, where necessary, value adjustments made in accordance with Group policy. These value adjust-ments take into account the value of any collateral (at liquidationvalues)and thefinancial standingofthe borrower. They are set off against the correspon-ding assets.

Several Islamic Banking branches in Pakistan and South Africa maintain "Assets held under Ijarah" agreements. Acquired assets under this agreement are stated at cost less accumulated depreciation and impairment, if any.

Value adjustments for default risks

Receivables where it is considered unlikely that the debtor will fulfill his obligations are considered atrisk. In particular, receivables where interest and commissions are more than 90 days overdue are considered to be at risk. Interest at risk, and interest, which is impaired, are not recognised as income but are deducted, together with value adjustment against the capital amount, from the respective asset. Should the collection of interest in respect of "Amounts due from customers" and "Mortgage loans" be uncertain, interest is not calculated.

For consumer loans, specific value adjustments ac-cording to time-based criteria are built where interest is overdue for more than 60 days.

Value adjustments for country risk are assessed in accordance with the guidelines on the management of country risk from the Swiss Bankers Association. Furthermore,country-specificvalueadjustmentsforlatent default risk are maintained based on the dif-ferentiated risk profiles recognised for individualsectors of the loan portfolios, or where uncertainty is reflected by additional value adjustments. Value adjustments for country risk, as well as country specificvalueadjustmentsforlatentdefaultrisk,arededucted from "Amounts due from customers".

Trading portfolio assets

"Trading portfolio assets" positions consist mainly of debt instruments. They are valued at fair value as at the balance sheet date.

Other financial instruments at fair value

"Otherfinancialinstrumentsatfairvalue"whicharetraded on an active market, which meet the conditions for an assessment at fair values according to FINMA Circular 2015/1 "Accounting – Banks" and which are not intended to be held until maturity are valued according to this principle.

22


GROUP

Financial investments

"Financial investments" consist mainly of debt in-struments. The majority of these are acquired with the intention of holding them until maturity and are hence carried at cost adjusted for the amortisation of premiums and discounts using the accrual method.

The remaining investments in this positions are va-lued at the lower of cost or market value principle. This position also includes some equity interests as well as real estate which has been assumed from the lending business for resale, and which are valued at the lower of cost or market value.

Derivative financial instruments

Derivative financial instruments consist entirely oftrading instruments which are reported at fair value. The realised and non-realised gains and losses from these transactions are reported under "Result from trading activities and the fair value option".

TheGrouphadnosignificantopenderivativetrans-actions on its own account at the balance sheet date. Positive and negative replacement values of open derivative financial instruments are shown in the balance sheet as a separate line item. The respective contract volumes are shown in the note 4.

Non-consolidated participations

Long-term holdings in associated companies, none of which exceed 10%, are valued at cost less any econo-mically necessary depreciation.

Tangible fixed assets

"Tangible fixed assets" used for more than one accounting period and which exceed the thresholds definedbytheGrouparecapitalised.Inthiscasetheyare depreciated on a straight-line basis over the peri-od of their estimated useful lifetime. Estimated life times have been set as follows:

Bank buildings and other real estate 25-50 yearsProprietary or separately acquired software 3-5 yearsOthertangiblefixedassets 3-10years

No depreciation is charged on land except where value adjustments have been made to allow for a re-ductioninmarketvalue.The"Tangiblefixedassets" are re-assessed whenever circumstances suggest that their value may have fallen below their book value.

Intangible assets: Goodwill

Goodwill in the balance sheet results from the pre-mium paid over net asset value from an acquired company. In such cases the recorded goodwill is reviewed for impairment every year, and written off overfiveyearsonastraightlinebasis.

Provisions

TheGrouprecords"Provisions"tocoverspecificrisks that are based on a past event that represent a prob-able obligation and for which the amount can be reliably estimated.

Reserves for general banking risks

These taxed reserves are held in line with the Group's prudent policies as precautionary reserves to hedge against latent risks in the Group's operating activities. They form part of the "Common equity Tier 1 capi-tal" of the Group.


"Contingent liabilities" relate mainly to irrevocable commitments originating from letters of credit and guarantees. These are generally fully secured. Neces-sary provisions are recorded on balance sheet under "Provisions". Contingent liabilities, together with irrevocable commitments and credit commitments, are recorded at nominal value.

23


GROUP

Fiduciary transactions are converted into CHF at the rates prevailing at the balance sheet date and are shown at nominal value.

Taxes and deferred taxes

Income taxes are based on the tax laws of each tax authority and are expensed in the period in which the relatedprofitsaremade.Deferredtaxesarisingfromtemporal differences between the stated values of assets and liabilities in the consolidated sheet and their corresponding tax values are recongnised as deferred tax assets or deferred tax liabilities. Defer-red tax assets are capitalised if there is likely to be enough taxable profit to offset these differences infuture.

Pension fund commitments

In Switzerland, the occupational benefit plans arecovered by Allianz Suisse Insurance Company. All employees are insured in accordance with the law, the foundation document and the regulations of the benefitplan.Intheothercountriespensionliabilitiesare covered by insurance companies or are posted directly to the balance sheet. The employer contribu-tion is included under "Personnel expenses".

Receivables and payables from related parties and governing bodies

Receivables and payables from governing bodies include credit lines to board members and General Management. These transactions have been executed in accordance with the current internal regulations on employee loans, advances and deposits.

Receivables and payables from governing bodies are included in note 16.

24


GROUP

Explanations of risk management

Risk & Control Framework

The Group's Risk & Control Framework is the corner-stone for risk management and control. It provides the basis to identify, assess and effectively manage risks within the Group. Furthermore, the Risk & Control Framework assigns the overall responsibility for a par-ticular risk class, defines who manages risk and who performs independent risk control.

Risk organisation

The Board of Directors' responsibilities are the fol-lowing:•The Board of Directors is responsible for the strategic direction, supervision and control of the Group, and for defining our overall risk tolerance by means of a risk appetite statement and overall risk limits;•TheRisk&ControlCommitteesupportstheBoard of Directors in fulfilling its oversight responsibilities by providing guidance regarding risk governance and the Group's risk profile, including the regular review of major risk exposures and overall risk limits; and•The Audit Committee supports the Board of Directors in fulfilling its oversight responsibilities by monitoring General Management's approach with respect to financial reporting, internal controls and accounting. Additionally, the Audit Committee is responsible for ensuring independence and monitoring the performance of Group Internal Audit and the external auditors.

On an operational level, the Group operates with a three-line of defence model whereby business and revenue generation, risk management oversight and risk control are performed by functions independent of one another.

Furthermore, a clear distinction is made between "risk owners", "risk managers" and "risk controllers":

•Risk owners bear the overall supervision and responsibility for the management of specific risk classes or risk types; •Riskmanagersfocusonthemonitoringandproac- tive management of risk. They initiate risk management measures and can change the risk profile; •Riskcontrollersindependentlymonitorandassess risk as well as highlight deviations from target risk parameters and non-compliance with policies.

Risk management principles

The following general principles are applied to maintain an appropriate balance between risk and return to:•ProtectthefinancialstrengthoftheGroupbymoni- toring our risk exposures and avoiding potential risk concentrations at individual exposure levels, at specific portfolio levels and at an aggregate Group-wide level across all risk types;•Protect our reputation through a sound risk cul- ture characterised by a holistic and integrated view of risk, performance and reward, and through full compliance with our standards and principles;•Systematicallyidentify,classifyandmeasurerisks applying best practice;•Ensuremanagementaccountability,wherebyBusi- ness Line Management owns all risks assumed and is responsible for the active management of all risk exposures to ensure that risk and return are balanced;•Setupindependentriskcontrolfunctionsorunits, which monitor effectiveness of risk management and oversee risk-taking activities;• Disclose risks to the Board of Directors, regula- tors and other stakeholders in a comprehensive and transparent manner.

Internal controls

Internal controls are processes and instruments used to monitor and control operational and other business risks. In order to continuously enhance the Group's internal control system and the effectiveness of con-trols, results of actual control processes are reviewed

25


GROUP

and the outcome of the Group's Operational Risk Management processes is taken into account. The organisational units responsible for internal controls work closely with other organisational units within the Group.

Credit risk

Credit risk arises from the possibility that a coun-terparty, i.e. private and corporate clients, financialinstitutions as well as issuers or sovereigns, does not fulfilcontractualobligationsorthecreditqualityde-teriorates. In order to manage potential default risk and other prevailing credit risks most effectively, it is divided into the following risk types: client credit risk, issuer credit risk, counterparty credit risk, coun-try risk (including cross-border / transfer risk), settle-ment risk and credit concentration risk.

The Group Credit Management Committee is respon-sible for credit risks and credit decisions, which may be delegated to the respective Country Credit Man-agement Committees. The Group manages its credit risk within a conservative framework by evaluating the creditworthiness of the borrowing counterparties, setting appropriate credit limits and obtaining collat-eral as deemed necessary. For each collateral type a minimumhaircut isdefined inorder toaccount forthe volatility in market values according to the na-ture and liquidity of the collateral. Around 41% of the Group's credit exposure is secured by property and only 15% is unsecured.

TheGroup'screditriskappetiteisdefinedandmoni-tored through a comprehensive system of credit limits.

The Group has its own rating system for corporate clients. Each credit is assessed as to the borrower's credit worthiness, collateral coverage and collateral quality, as well as the underlying transaction rationale, business potential and any additional risk mitigations. Personal credits are usually only granted on a fully collateralized basis. Collateral coverage is monitored on a regular basis and according to the prevailing market conditions.

Adequate and clear segregation of duties are es-tablished among the various organisational units involved in the acquisition of credit business, the analysis and approval of a credit request, and the sub-sequent administration.

Bank counterparties, issuers and sovereigns are ana-lysed according to their financial performance andtheir external rating. Over 65% of the credit exposure tofinancialinstitutionsisofinvestmentgradequalityand the remaining 35% consists mainly of short-term tradefinanceexposureinemergingmarkets,towhichthe Group has close links, and monitors the portfolio with a set of country limits.

Regarding non-performing loans, the Group is in a comfortable position: After taking the collateral at market value and the individual value adjustments into account, the net unsecured and un-provided position at the end of December 2016 was only CHF 4.3 million.

Country risks are monitored quarterly and are either protected by guarantees obtained from the World Bank (MIGA) or provided for in accordance with the guidelines of the Swiss Bankers Association using international ratings.

Liquidity Risk

The Group applies a prudent approach to liquidity risk management. The Group Asset & Liability Man-agement Committee oversees liquidity and market risks regularly.

The Group grants advances and loans to clients both on a short-term basis and with tenors generally up to 5 years. Funding is primarily obtained through depos-its, which are mainly at sight, or short-term deposits. Wholesalefundingisnotsignificantanddepositsarewelldiversified.Nosingledepositoraccountsformorethan 5% of the Group's total deposits. Excess liquidity is held asbankplacementsorfinancial investments.The latter primarily consist of bond portfolios of sov-ereign issuers or other issuers of high quality.

26


GROUP

the interest periods for client deposits taken. To limit interest rate risk most client advances are agreed on a 3- or 6-month base rate plus a credit spread.

In addition, branches and subsidiaries have placed excessliquidityinbankplacementsorinfinancialin-vestments with tenors usually up to 3-5 years. While thevolumeoffinancial investments iskept limited,the averagedurationof thefixed incomeportfolioscreates interest rate risk exposure given the absence oflong-termwholesalefinancing.

For foreign exchange risks the Group pursues a risk-adverse approach and aims at keeping potential for-eign exchange losses low. The Group does not pursue proprietary foreign exchange trading activities.

Profitsearned in theBank'sbranchesaresubject toexchange rate risk up to their remittance to Habib Bank AG Zurich, Zurich. These risks are monitored intheHeadOffice,andprofitshedgedasfeltappro-priate. Capital and reserves held in the branches are also subject to foreign exchange risk insofar as they are held in local currencies. Any foreign exchange translation gain or loss on these capital and reserves is taken to the income statement in the year in which it occurs.

Operational risk

Operationalriskisdefinedastheriskoflossresultingfrom inadequate or failed internal processes, people, systems or from external events.

The Group makes use of six operational risk man-agement processes, which consist of key risk indi-cators, change risk assessment, risk self-assessment, scenario analysis, risk event management and issue management & action tracking.

Furthermore, three types of risk mitigation measures are used and comprise, control enhancement, business continuity management and other mitigation meas-ures (risk avoidance, risk reduction, risk transfer).

The contractual maturities of the Group's financialassetsexceedthecontractualmaturitiesofthefinan-cial liabilities. However, when determining maturity gaps, the stickiness of deposits or economic maturi-ties needs to be considered,which significantly re-duces the contractual gaps. Furthermore, individual client groups in different countries will not act in the same way and at the same time.

In general, the Group is exposed to potential larger depositoutflowsand suddenadversemarketdevel-opments. Therefore, related scenarios have been ana-lyzed as part of three liquidity stress tests performed throughout the Group. The stress test results showed that the liquid assets available could absorb projected outflowsinallcases.

The Group maintains a strong liquidity position, which is further supported by established repo func-tionalities. In addition, liquidity coverage ratio targets havebeendefinedforalloperatingGroupcompanies.

The short-term liquidity disposition and liquidity situation of individual countries are monitored by the respective country treasury functions. In addition, liquidity reserves are held both on Group and on country level and contingency funding plans are in place for the Group, all branches and subsidiaries.

Market risk

The Group is exposed to market interest rate risk, for-eign exchange risk and, to a very limited extent, to equities and commodities risk.

TheGroup'smarketriskappetiteisdefinedandmon-itored through a comprehensive system of market risk limits by the Group Asset & Liability Manage-ment Committee. Furthermore, the Group regularly performs scenarios and stress tests for interest rate and foreign exchange risks based on prevailing risk exposures.

The Group is exposed to interest rate risk due to inter-est periods set for advances made to clients exceeding

27


GROUP

To pro-actively address risks related to potential business disruptions, business impact analyses, cri-sis management teams and business continuity plans have been established for the Group as well as for all branches and subsidiaries.

Legal and compliance risk

Legal risk is the risk that the Group will conduct ac-tivities or carry out transactions in which it is inad-equately covered or is left exposed to potential litiga-tion. It is the possibility that a failure to meet legal requirements may result in unenforceable contracts, litigation,fines, penalties or claims for damagesorother adverse consequences.

Compliance risk is the risk of legal or regulatory sanctions,materialfinancialloss,orlosstotherepu-tation the Group may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of con-duct applicable to its banking activities.

Measures aimed at minimizing legal and compliance risks include raising employee awareness of legal and regulatory issues through training and internal directives and controls to ensure adherence to the legal and regulatory requirements within which the Group operates.

In line with the development of the legal and regu-latory environment of the industry, the Group has consistently invested in personnel and technical re-sources to ensure adequate compliance coverage. A comprehensive framework of policies and regular specialised training sessions ensure that employees receive appropriate ongoing education and training in this area.

Reputation risk

Reputation risk is the risk that illegal, unethical or inappropriate behavior by representatives of the Group, members of staff or clients will damage

Habib Bank AG Zurich's reputation, leading poten-tiallytoalossofbusiness,finesorpenalties.

The Group has established a Code of Conduct and promotes transparency and ethical behavior.

Systemic risk

Systemicriskcanbedefinedasariskofdisruptiontofinancialservicesthatiscausedbyanimpairmentofallorpartsofthefinancialsystemandhasthepo-tential to have serious negative consequences for the real economy.

The Group analyses on a regular basis factors which could have a destabilizing impact on the financialsystem, which include, amongst others, the fragile economicdevelopment,continuedfinancialmarketsuncertainty, numerous political crises, increased ex-posure to cyber attacks, as well as the ever-increasing extent and complexity of regulation. Based on this analysis the Group implements mitigating measures wherever possible.

Events after the balance sheet date

Noevents thatwould adversely affect thefinancialstatements included in this report occurred after the balance sheet date.

28


GROUP

1 Structure of securities financing transactions (assets and liabilities)

in CHF 000's 31.12.16 31.12.15

Book value of receivables from cash collateral related to securities borrowing and reverse-repurchase transactions* 6'238

Book value of payables from cash collateral posted for securities lending and repurchase transactions* 132'764 72'946

Book value of securities lent in connection with securities lending or delivered as collateral in connection with securities borrowing as well as securities in own portfolio transferred in connection with repurchase transactions 132'764 72'946- of which those with an unrestricted right to resell or pledge

Fair value of securities serving as collateral posted for securities lending or securities borrowed or securities received in connection with reverse-repurchase transactions with an unrestricted right to resell or repledge them

- of which repledged securities

- of which resold securities

* Before taking into consideration any netting agreements

Information on the financial statements

29


GROUP

2 Collateral for loans and off balance sheet transactions, as well as impaired loans / receivables

Type of collateral

in CHF 000'sMortgage coverage

Secured by other

collateral Unsecured TotalLoans (before netting with value adjustments)

Due from customers 877'987 1'580'657 543'820 3'002'464

Mortgage loans 583'452 180 583'632

- Residential and commercial property 471'038 87 471'125

- Commercial premises 112'414 93 112'507

Total loans (before netting with value adjustments) 31.12.16 1'461'439 1'580'837 543'820 3'586'096

31.12.15 1'417'304 1'474'889 546'213 3'438'406

Total loans (after netting with value adjustments) 31.12.16 1'379'569 1'432'786 506'520 3'318'875

31.12.15 1'240'663 1'457'549 497'150 3'195'361

Off balance sheet

Contingent liabilities 103'821 1'034'688 243'954 1'382'463


Credit commitments 34'319 98'237 43'206 175'762

Total off balance sheet 31.12.16 138'140 1'132'925 288'540 1'559'605

31.12.15 26'611 1'247'802 121'906 1'396'319

in CHF 000's Gross debt

amount

Estimated liquidation

value of the collateral

Net debt amount

Individual value

adjustmentsImpaired loans / receivables

31.12.16 396'101 127'178 268'923 258'760

31.12.15 347'145 105'644 241'501 235'852

30


GROUP

3 Breakdown of trading portfolios and other financial instruments at fair value

in CHF 000's 31.12.16 31.12.15Assets

Trading portfolios 143 98 Debt instruments, money-market instruments, money-market transactions 143 98 - of which listed 143 98 Equity interests

Precious metals and commodities

Other trading assets

Other financial instruments at fair value 2'781'867 2'437'957 Debt instruments 2'736'075 2'379'959Structure products

Others 45'792 57'998

Total assets 2'782'010 2'438'055 - of which determined by valuation model

- of which securities allowed for repo transactions in accordance with liquidity requirements

31


GROUPKarakorum Highway (Pakistan)

32


GROUP

4 Presentation of derivative financial instruments

Trading instruments

in CHF 000's

Positivereplacement

values

Negativereplacement

valuesContractvolume

Interest rate instruments

Forward contracts, including FRAs

Swaps

Futures

Options (OTC)

Options (exchange-traded)

Foreign exchange / precious metals

Forward contracts 10'340 10'918 3'242'525 Combined interest rates / currency swaps

Futures

Options (OTC)


Equity interests / indices

Forward contracts

Swaps

Futures

Options (OTC)

Options (exchange-traded) 4'423

Credit derivatives

Credit default swaps

Total return swaps

First-to-default swaps

Other credit derivatives

Other

Forward contracts

Swaps

Futures

Options (OTC)


Total before taking into consideration netting agreements

Total at 31.12.16 10'340 10'918 3'246'948- of which determined by using a valuation model

33


GROUP

in CHF 000's

Positive replacement

value(accumulated)

Negative replacement

value(accumulated)

Total after taking into consideration netting agreements

Total at 31.12.16 10'340 10'918

at 31.12.15 8'092 10'918

5 Breakdown by counterparties of derivative financial instruments

in CHF 000'sCentral

clearing partiesBanks and

securities dealers Other clientsPositive replacement values (after netting agreements) at 31.12.16 1'638 5'020 3'682 Positive replacement values (after netting agreements) at 31.12.15 320 5'906 1'866

The Group has no hedging instruments.

Trading instruments

in CHF 000's

Positivereplacement

values

Negativereplacement


Total at 31.12.15 8'092 10'918 3'241'949 - of which determined by using a valuation model

34


GROUP

6 Breakdown of financial investments

Book value Fair value

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Debt instruments 1'303'628 1'126'308 1'313'490 1'129'570

- of which held until maturity 1'124'400 1'126'308 1'133'893 1'129'570

- of which not held until maturity 179'228 179'597

Equity interests 846 972 870 972

Real estate 12'298 11'897 16'642 17'674

Total 1'316'772 1'139'177 1'331'002 1'148'216

- of which securities allowed for repo transactions in accordance with liquidity requirements 159'815 206'630

in CHF 000's AAA AA A BBB BB to B Unrated

Book values at 31.12.16 194'838 148'652 259'433 515'624 179'298 18'927

at 31.12.15 198'454 123'957 181'671 417'359 176'906 40'831

Rating category is based on the sovereign foreign currency long-term rating system from Fitch.

7 Breakdown of the counterparty according to rating

35


GROUP

8 List of consolidated companies in which the Bank permanently holds direct or indirect participation of significance

Business activities

Share capital (in 1'000)

Capital share

Proportion of voting

rights Direct

ownership

Indirect

ownershipCompany name and registered office

Habib Canadian Bank Limited, Toronto, Canada Bank CAD 30'000 100% 100% 100% 0%

HBZ Bank Limited, Durban, South Africa Bank ZAR 50'000 100% 100% 100% 0%Habib European Limited, Douglas, Isle of Man

Company in liquidation

GBP 1 100% 100% 100% 0%

HBZ Services FZ-LLC, Dubai, UAE Service centre AED 300 100% 100% 100% 0%

Habib Metropolitan Bank Ltd., Karachi, Pakistan Bank PKR 10'478'315 51% 51% 51% 0%Habib Bank Zurich (Hong Kong) Ltd., Hong Kong

Restricted Licence Bank

HKD 300'000 51% 51% 51% 0%

Habib Bank Zurich Plc, London, UK Bank GBP 60'000 100% 100% 100% 0%

36


GROUP

Reporting year

in CHF 000's Acquisition cost

Accumulated amortisations or

value adjustments (equity valuation)

Book value at 31.12.15 Reclassifications Additions Disposals

Value adjustments of participations

interestBook value at

31.12.16 Market valueOther participation with no market value

- S.W.I.F.T. SCRL, Belgium 88 88 88Total 88 88 88

9 Presentation of non-consolidated participations

10 Tangible fixed assets

Reporting year

in CHF 000's Acquisition costAccumulated depreciation

Book value at 31.12.15 Reclassifications Additions Disposals* Depreciation Reversals

Book value at 31.12.16

Bank buildings and residential apartments 99'246 -32'335 66'911 639 -2'527 -3'135 61'888

Other real estate 21'248 -13'781 7'467 3'171 181 -2'571 8'248

Proprietary or separately acquired software 3'332 -3'139 193 -112 2'353 -10 -438 1'986

Other tangible fixed assets 53'235 -40'870 12'365 112 8'653 -83 -5'194 15'853

Tangible assets acquired under financial leases;

- of which bank buildings

- of which other real estate

- of which other tangible fixed assets

Total 177'061 -90'126 86'936 14'816 -2'439 -11'338 87'975

* including net of foreign currency adjustments

37


GROUP

Reporting year

in CHF 000's Acquisition cost

Accumulated amortisations or

value adjustments (equity valuation)

Book value at 31.12.15 Reclassifications Additions Disposals

Value adjustments of participations

interestBook value at

31.12.16 Market valueOther participation with no market value

- S.W.I.F.T. SCRL, Belgium 88 88 88Total 88 88 88

Reporting year

in CHF 000's Acquisition costAccumulated depreciation

Book value at 31.12.15 Reclassifications Additions Disposals* Depreciation Reversals

Book value at 31.12.16

Bank buildings and residential apartments 99'246 -32'335 66'911 639 -2'527 -3'135 61'888

Other real estate 21'248 -13'781 7'467 3'171 181 -2'571 8'248

Proprietary or separately acquired software 3'332 -3'139 193 -112 2'353 -10 -438 1'986

Other tangible fixed assets 53'235 -40'870 12'365 112 8'653 -83 -5'194 15'853

Tangible assets acquired under financial leases;

- of which bank buildings

- of which other real estate

- of which other tangible fixed assets

Total 177'061 -90'126 86'936 14'816 -2'439 -11'338 87'975

* including net of foreign currency adjustments

38


GROUP

12 Breakdown of other assets and other liabilities

Other assets Other liabilities

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Compensation account

Deferred income tax recognised as assets 55'910 50'692

Others 21'762 24'091 33'388 35'333

Total 77'672 74'783 33'388 35'333

11 Intangible assets

Reporting year

in CHF 000's

Acqui- sition

cost

Accumu- lated

amorti-sations

Book value at31.12.15

Invest- ment

Divest- ment

Amorti- sations

Book value at31.12.16

Goodwill 8'567 -5'139 3'428 -1'715 1'713

Patents

Licenses

Other intangible assets

Total 8'567 -5'139 3'428 -1'715 1'713

39


GROUP

13 Disclosure of assets pledged or assigned to secure own commitments and of assets under reservation of ownership*

Book value Effective commitmentsin CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15Assets pledged

Amounts due from banks 924 1'862 580 599


Assets put under ownership reservation

Total 9'946 9'509 580 599

* Excluding securities financing transactions

14 Payable to own employee benefit plans

in CHF 000's 31.12.16 31.12.15Payables to employee benefit plans 54 116

Commitments to own pension and welfare plans

The Group does not maintain its own pension funds. The occupational benefit plans in the countries are covered by insurance companies. All employees are insured in accordance with the law, the foundation document and the regulations of the benefit plan.

In accordance with the contractual and legal conditions of the benefit plan in the countries there can be neither eco-nomic liabilities that exceed the contributions set by the regulations of the benefit plan, nor economic benefits for the Group. In addition, during both the reporting year and during the previous year, there were no non-committed plans, nor was there an employer-paid contribution reserve, such that the expenses shown in the income statement equal the actual expenses for pension and welfare plans for the reporting period.

40


GROUP

in CHF 000's Balance at 31.12.15

Use in conformity with designated

purpose ReclassificationsCurrency

differencesPast due interest,

recoveriesNew creations

charged to income Releases to income Balance at 31.12.16Provisions for deferred taxes 3'478 -349 3'129 Provisions for pension fund obligations Provisions for default risks 3'316 552 -1'115 2'753 Provisions for other business risks 11'047 -3'046 -284 300 -7'160 857 Provisions for restructuring 150 -295 7 214 76 Other provisions Total provisions 17'991 -3'341 -74 514 -8'275 6'815

Reserves for general banking risks 556'136 10'215 -20'643 545'708

Value adjustments for default risks and country risks 243'788 -26'257 6'065 3'796 48'058 -7'479 267'971 - of which value adjustments for default risks in respect of impaired loans 235'852 -26'257 6'174 3'796 45'699 -6'504 258'760 - of which value adjustments for default risks in respect of financial investments 743 -9 750 -734 750 - of which value adjustments for latent risks 7'193 -100 1'609 -241 8'461

15 Value adjustments and provisions and reserves for general banking risks

41


GROUP

in CHF 000's Balance at 31.12.15


purpose ReclassificationsCurrency



charged to income Releases to income Balance at 31.12.16Provisions for deferred taxes 3'478 -349 3'129 Provisions for pension fund obligations Provisions for default risks 3'316 552 -1'115 2'753 Provisions for other business risks 11'047 -3'046 -284 300 -7'160 857 Provisions for restructuring 150 -295 7 214 76 Other provisions Total provisions 17'991 -3'341 -74 514 -8'275 6'815

Reserves for general banking risks 556'136 10'215 -20'643 545'708

Value adjustments for default risks and country risks 243'788 -26'257 6'065 3'796 48'058 -7'479 267'971 - of which value adjustments for default risks in respect of impaired loans 235'852 -26'257 6'174 3'796 45'699 -6'504 258'760 - of which value adjustments for default risks in respect of financial investments 743 -9 750 -734 750 - of which value adjustments for latent risks 7'193 -100 1'609 -241 8'461

42


GROUP

16 Disclosure of amounts due from / to related parties

Amounts due from Amounts due to

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Qualified holdings 81'740 62'227

Associates

Transactions with members of governing bodies 1'691 1'520 17'930 14'506

Other related parties

43


GROUP

17 Maturity structure of financial instruments

Due

in CHF 000's At sight Cancel-

lable Within

3 months

Between 3 and 12

months

Between 12 months

and 5 yearsAfter

5 yearsNo

maturity TotalAsset / financial instruments

Liquid assets 1'300'845 1'300'845Amounts due from banks 210'528 78'895 1'781'917 279'237 17 2'350'594

Amounts due from securities financing transactions 6'238 6'238Amounts due from customers 265'961 1'443'710 496'612 398'213 132'407 2'736'903Mortgage loans 75'417 56'215 116'037 253'387 80'916 581'972Trading portfolio assets 143 143

Positive replacement values of derivative financial instruments 10'340 10'340

Other financial instruments at fair value 2'781'867 2'781'867Financial investments 324'099 61'039 71'342 669'638 190'654 1'316'772Total 31.12.16 4'975'438 78'895 3'342'881 963'228 1'321'255 403'977 11'085'674

31.12.15 4'731'220 6'809 3'140'636 1'253'630 975'067 186'420 10'293'781

Liabilities / financial instruments

Amounts due to banks 120'119 247'661 59'801 427'581

Liabilities from securities financing transactions 117'764 15'000 132'764

Amounts due in respect of customer deposits 5'265'753 428'655 2'015'805 1'381'289 220'450 2'362 9'314'314

Negative replacement values of derivative financial instruments 10'918 10'918Total 31.12.16 5'514'554 428'655 2'278'466 1'441'089 220'450 2'362 9'885'577

31.12.15 5'066'278 339'448 2'237'282 1'295'042 215'909 7'608 9'161'565

44


GROUP

18 Assets and liabilities broken down by domestic and foreign origin in accordance with domicile principle

31.12.16 31.12.15

in CHF 000's Domestic Foreign Domestic Foreign

Assets

Liquid assets 65'371 1'235'474 54'037 988'678

Amounts due from banks 288'459 2'062'135 290'140 2'180'240

Amounts due from securities financing transactions 6'238

Amounts due from customers 31'927 2'704'976 55'252 2'719'353

Mortgage loans 581'972 420'757


Positive replacement values of derivative financial instruments 970 9'370 12 8'079

Other financial instruments at fair value 2'781'867 2'437'957

Financial investments 141'918 1'174'854 150'944 988'233

Accrued income and prepaid expenses 6'369 189'739 8'576 115'047

Non-consolidated participations 88 88

Tangible fixed assets 9'527 78'448 9'933 77'002

Intangible assets 1'713 3'427 1

Other assets 1'087 76'583 8'135 66'648

Total 547'341 10'901'887 580'456 10'002'182

Liabilities

Amounts due to banks 22'399 405'182 14'776 367'172 Liabilities from securities financing transactions 15'000 117'764 20'000 52'946 Amounts due in respect of customer deposits 171'223 9'143'091 144'253 8'551'501

Negative replacement values of derivative financial instruments 210 10'708 1'350 9'568

Accrued expenses and deferred income 528 230'817 3'547 139'398

Other liabilities 11'243 22'146 9'214 26'119

Provisions 137 6'678 8'623 9'368

Reserves for general banking risks 107'171 438'537 172'250 383'886


Retained earnings reserves 286'015 272'832 -17'646

Currency translation reserves 2'038 -13'073

Minority interest in equity 215'909 34'932 153'394

Group profit / loss 14'357 78'076 17'141 71'087

Total 780'321 10'668'908 835'846 9'746'792

45


GROUP

19 Breakdown of total assets by countries or regions (domicile principle)

in CHF 000's 31.12.16 31.12.15

Assets

Europe 1'780'525 15.6% 1'898'004 17.9%

of which Switzerland 547'341 4.8% 568'928 5.4%

United Kingdom 732'658 6.4% 813'077 7.7%

Others 500'526 4.4% 515'998 4.9%

North America 332'758 2.9% 262'574 2.5%

Asia 8'461'106 73.9% 7'753'008 73.3%

of which UAE 2'596'664 22.7% 2'619'492 24.8%

Pakistan 5'207'732 45.5% 4'545'168 42.9%

Others 656'710 5.7% 588'349 5.6%

Other countries 874'840 7.6% 669'052 6.3%

of which South Africa 316'400 2.8% 288'347 2.7%

Others 558'440 4.8% 380'705 3.6%

Total 11'449'229 100.0% 10'582'638 100.0%

20 Breakdown of total assets by credit rating of regions (risk domicile principle)

in CHF 000'sNet foreign exposures

at 31.12.16Net foreign exposures

at 31.12.15AAA 815'075 7.5% 1'661'151 16.6%

AA+ to AA- 1'176'894 10.8% 346'160 3.5%

A+ to A- 2'688'372 24.7% 2'682'276 26.8%

BBB+ to BBB- 387'076 3.6% 406'278 4.1%

BB+ to B- 5'629'164 51.6% 4'814'689 48.1%

CCC 3'085 0.0% 0.0%

Unrated 202'222 1.8% 91'628 0.9%

Total 10'901'888 100.0% 10'002'182 100.0%


46


GROUP

21 Assets and liabilities broken down by the most important currencies for the Group

in CHF 000's CHF USD GBP AED PKR Other Total

Asset

Liquid assets 65'371 202'935 119'780 661'579 235'339 15'841 1'300'845

Amounts due from banks 1'028 904'096 190'378 647'373 188'110 419'609 2'350'594

Amounts due from securities financing transactions 6'238 6'238Amounts due from customers 11'691 431'088 437'298 588'888 1'169'713 98'225 2'736'903

Mortgage loans 405'924 20'814 155'234 581'972


Positive replacement values for derivative financial instruments 970 689 7'532 1'149 10'340Other financial instruments at fair value 2'781'867 2'781'867

Financial investments 286'540 454'016 82'903 304'849 188'464 1'316'772

Accrued income and prepaid expenses 4'646 612 1'353 23'145 162'425 3'926 196'107

Non-consolidated participations 88 88

Tangible fixed assets 9'527 8'661 19'718 31'337 18'732 87'975

Intangible assets 1'713 1'713

Other assets 241 3'439 2'092 14'079 51'243 6'578 77'672

Total assets shown in balance sheet 381'815 1'996'329 843'154 2'360'706 4'959'467 907'758 11'449'229

Delivery claims from spot exchange transactions, foreign exchange forwards and foreign exchange options 14'254 853'423 113'306 485'217 155'062 1'621'262Total assets 396'069 2'849'752 956'460 2'360'706 5'444'684 1'062'820 13'070'491

47


GROUP

in CHF 000's CHF USD GBP AED PKR Other Total

Liabilities

Amounts due to banks 1'490 39'711 12'238 37'458 308'631 28'053 427'581

Liabilities from securities financing transactions 15'000 117'764 132'764Amounts due in respect of customer deposits 63'253 2'096'212 780'012 1'889'983 3'769'830 715'024 9'314'314

Negative replacement values of derivative financial instruments 210 633 8'979 1'096 10'918Accrued expenses and deferred income 1'846 19 4'473 21'095 193'037 10'876 231'346

Other liabilities 829 628 4'895 13'598 11'333 2'105 33'388

Provisions 16 120 77 495 5'881 226 6'815

Reserves for general banking risks 107'354 2'666 357'235 31'469 46'984 545'708


Retained earnings reserves 286'015 286'015

Currency translation reserves 2'038 2'038

Minority interest in equity 180'702 35'207 215'909

Group profit / loss 14'357 4'777 20'355 57'861 -4'917 92'433

Total liabilities shown in balance sheet 642'408 2'136'690 809'771 2'340'219 4'685'487 834'654 11'449'229

Delivery commitments from spot exchange transactions, foreign exchange forwards and foreign exchange options 88'780 694'222 73'410 2'512 604'041 158'297 1'621'262Total liabilities 731'188 2'830'912 883'181 2'342'731 5'289'528 992'951 13'070'491

Net position for each currency -335'119 18'840 73'279 17'975 155'156 69'869

48


GROUP

22 Breakdown of contingent liabilities and contingent assets

in CHF 000's 31.12.16 31.12.15Credit guarantees and similar 546'777 401'166Irrevocable commitments due to documentary credits 835'686 781'150Total contingent liabilities 1'382'463 1'182'316

Contingent assets arising from tax losses carried forward 5'765Other contingent assets

Total contingent assets 5'765

23 Breakdown of credit commitments

in CHF 000's 31.12.16 31.12.15Commitments arising from acceptances 139'509 151'488

Other credit commitments 36'253 60'919

Total 175'762 212'407

24 Breakdown of fiduciary transactions

in CHF 000's 31.12.16 31.12.15

Fiduciary investments with third-party companies 78'818 71'680

Fiduciary transactions from securities lending and borrowing which are carried out by the Bank acting under its own name but on behalf of clients 18'046 18'267Total 96'864 89'947

49


GROUP

25 Breakdown of the result from trading activities and the fair value option

in CHF 000's 2016 2015

Result from trading activities

Interest rate instruments (incl. funds) 21'096 34'982

Unrealised forex gains / losses on reserves held in foreign currencies 14'261 -3'238

Foreign exchange 21'838 25'311

Commodities / precious metals 64 -258

Total 57'259 56'797

- of which from the fair value option applied to assets 21'096 34'982

26 Breakdown of personnel expenses

in CHF 000's 2016 2015

Salaries and additional allowances 123'189 117'205

- of which expenses related to share-based compensation and alternative forms of variable compensation

Social insurance obligations 8'717 9'199

Other personnel expenses 5'617 4'589

Total 137'523 130'993

50


GROUP

28 Analysis of extraordinary income and expenses

in CHF 000's 2016 2015Extraordinary income

Release of provisions no longer required 25 Profit on sale of fixed assets 217 572 Recoveries and others 1'332 41 Total 1'574 612

Extraordinary expenses

Other -82Total -82

27 Breakdown of general and administrative expenses

in CHF 000's 2016 2015

Office space expenses 19'427 17'701

Expenses for information technology and telecommunications 10'443 8'938

Expenses for motor vehicles, machinery, furniture and other equipment and operating lease expenses 4'095 4'273 Audit fees 2'054 1'925

- of which for financial and regulatory audits 1'653 1'759

- of which for other services 400 166

Other operating expenses 30'941 30'176

Total 66'960 63'012

51


GROUP

29 Breakdown of operating result broken down according domestic and foreign origin according to the principle of permanent establishment

2016 2015

in CHF 000's Switzerland Abroad Switzerland Abroad

Net result from interest operations 6'453 192'545 10'539 221'347

Result from commission business and services 7'504 68'820 8'110 68'527

Result from trading activities and the fair value option 14'922 42'337 -313 57'110

Other result from other ordinary activities 24'018 -22'850 36'399 -35'305

Total net income 52'897 280'852 54'735 311'679

Personnel expenses 22'433 115'090 21'303 109'690

General and administrative expenses 13'554 53'406 12'488 50'524

Operating expenses 35'987 168'496 33'791 160'214Value adjustments on participations, depreciation and amortisation on tangible fixed and intangible assets -1'894 -12'051 -1'531 -10'805Changes to provisions and other value adjustments, and losses -2 7'763 -8'642 -3'254Operating result % Switzerland / Abroad

15'01412.2%

108'06887.8%

10'7717.3%

137'40692.7%

Taxes% Switzerland / Abroad

-1'9803.7%

-50'88796.3%

-2'9864.9%

-58'42695.1%

Group profit / loss% Switzerland / Abroad

14'35715.5%

78'07684.5%

7'7988.8%

80'43091.2%

Income and expenditure Switzerland: includes the Swiss operation and Head Office.

30 Presentation of current taxes, deferred taxes and disclosure of the tax rate

in CHF 000's 2016 2015Income taxes* 57'822 62'928Deferred tax expenses -4'955 -1'516Taxes 52'867 61'412

Average tax rate 43.0% 41.4%

* The utilisation of tax losses carried forward has led to CHF 1.1 million lower income taxes for the period.

52


GROUP

Report of the Statutory Auditor

To the General Meeting ofHabib Bank AG ZurichZurich

Report of the Statutory Auditor on the Consolidated Financial Statements

As statutory auditor, we have audited the accompanying consolidated financial statements of Habib Bank AG Zurich, which comprise the balance sheet, income statement, statement of changes in equity, cash flow statement and notes (pages 12 to 51 of the annual report) for the year ended 31 December 2016.

Board of Directors' ResponsibilityThe Board of Directors is responsible for the preparation of the consolidated financial statements in accordance with the provi-sions governing the preparation of financial statements for Banks and the requirements of Swiss law. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation and fair presentation of consoli-dated financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is fur-ther responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor's ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material mis-statement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made, as well as evaluating the overall presentation of the consolidated financial state-ments. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements for the year ended 31 December 2016 give a true and fair view of the finan-cial position, the results of operations and the cash flows in accordance with the provisions governing the preparation of financial statements for Banks and comply with Swiss law.

Report on Other Legal Requirements

We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.

In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of consolidated financial statements according to the instructions of the Board of Directors.

We recommend that the consolidated financial statements submitted to you be approved.

KPMG AG

Ertugrul Tüfekçi Mirko Liberto Licensed Audit Expert Licensed Audit ExpertAuditor in Charge

Zurich, 25 April 2017

53


GROUPIcefields Parkway (Canada)


54 BANK

Balance sheet (before appropriation)

in CHF 000's Note 31.12.16 31.12.15

Assets

Liquid assets 832'479 749'625

Amounts due from banks 1'792'927 1'806'721

Amounts due from customers 2 817'677 1'373'498

Mortgage loans 2 406'318 348'108

Trading portfolio assets 3 143 98

Positive replacement values of derivative financial instruments 4 970 495

Financial investments 6 751'427 826'425

Accrued income and prepaid expenses 29'568 24'746

Participations 329'994 237'187

Tangible fixed assets 25'946 35'133

Intangible assets 1'713 3'427

Other assets 8 22'102 18'339

Total assets 5'011'264 5'423'802

Total subordinated claims 25'158

- of which subject to mandatory conversion and/or debt waiver


55 BANK

in CHF 000's Note 31.12.16 31.12.15

Liabilities


Liabilities from securities financing transactions 1 15'000 20'000

Amounts due in respect of customer deposits 3'879'815 4'301'864

Negative replacement values of derivative financial instruments 4 210 1'749

Accrued expenses and deferred income 27'447 31'205

Other liabilities 8 15'273 20'750

Provisions 10 631 10'830

Reserves for general banking risks 10 507'141 489'580

Bank's capital 11 150'000 150'000

Statutory retained earnings reserves 78'800 77'000

Voluntary retained earnings reserves 214'117 196'413

Profit carried forward / loss carried forward 73 89

Profit / loss (result of the period) 37'138 34'784

Total liabilities 5'011'264 5'423'802


Contingent liabilities 327'005 269'879Irrevocable commitments 1'380 1'596Credit commitments 15 47'723 70'561


56 BANK

Income statement

in CHF 000's Note 2016 2015

Result from interest operations

Interest and discount income 80'989 101'967

Interest and dividend income from financial investments 22'535 18'562

Interest expense -14'842 -15'936

Gross result from interest operations 88'682 104'593

Changes in value adjustments for default risks and losses from interest operations -28'387 -15'812 Subtotal net result from interest operations 60'295 88'781

Result from commission business and services

Commission income from securities trading and investment activities 5'381 5'219

Commission income from lending activities 14'884 19'469

Commission income from other services 17'329 19'439

Commission expense -1'936 -2'846

Subtotal result from commission business and services 35'658 41'281

Result from trading activities and the fair value option 17 22'746 8'449

Other result from ordinary activities

Result from the disposal of financial investments 37 -1

Income from participations 12'523 26'412

Result from real estate 244

Other ordinary income 5'687 4'561

Other ordinary expenses -1'194

Subtotal other result from ordinary activities 17'053 31'217


57 BANK

in CHF 000's Note 2016 2015

Operating expenses

Personnel expenses 18 -48'323 -58'666

General and administrative expenses 19 -40'485 -44'231

Subtotal operating expenses -88'808 -102'896

Value adjustments on participations and depreciation and amortisation on tangible fixed and intangible assets -5'112 -5'626 Changes to provisions and other value adjustments and losses 6'808 -12'574

Operating result 48'640 48'631

Extraordinary income 20 1'377 22

Extraordinary expenses 20 -82

Changes in reserves for general banking risks -2'452 -1'580

Taxes 21 -10'427 -12'206

Profit / loss (result for the period) 37'138 34'784


58 BANK

Statement of changes in equity

in CHF 000'sBank's Capital

Statutoryretained earnings reserves

Reserves for general

banking risks

Voluntary retained

earnings and profit / loss

carried forward

Bankprofit

or loss Total

Equity at 01.01.16 150'000 77'000 489'580 196'502 34'784 947'866 Transformation of UK branch into subsidiary 15'109 4'901 20'010 Transfer of profits to retained earnings 1'800 15'000 -16'800 Capital increase / decrease Currency translation differences -2'198 -2'198Dividends and other distributions -16 -17'984 -18'000Other allocations to (transfers from) the reserves for general banking risks 2'452 2'452 Other allocations to (transfers from) other reserves Profit / loss (result of the period) 37'138 37'138

Equity at 31.12.16 150'000 78'800 507'141 214'189 37'138 987'268


59 BANK

1 Structure of securities financing transactions (assets and liabilities)

in CHF 000's 31.12.16 31.12.15Book value of receivables from cash collateral related to securities borrowing and reverse repurchase transactions*

Book value of payables from cash collateral posted for securities lending and repurchase transactions* 15'000 20'000Book value of securities lent in connection with securities lending or delivered as collateral in con-nection with securities borrowing as well as securities in own portfolio transferred in connection with repurchase transactions 15'000 20'000 - of which those with an unrestricted right to resell or pledge

Fair value of securities serving as collateral posted for securities lending or securities borrowed or secu-rities received in connection with reverse-repurchase transactions with an unrestricted right to resell or repledge them

- of which repledged securities

- of which resold securities

* Before taking into consideration any netting agreements

Information on the financial statements


60 BANK

2 Collateral for loans and off balance sheet transactions, as well as impaired loans / receivables

Type of collateral

in CHF 000'sMortgage coverage

Secured by other

collateral Unsecured Total

Loans (before netting with value adjustments)

Due from customers 72'861 344'709 465'906 883'476

Mortgage loans 407'898 407'898

- Residential and commercial property 407'898 407'898

- Commercial premisesTotal loans (before netting with value adjustments) 31.12.16 480'759 344'709 465'906 1'291'374

31.12.15 889'366 402'927 494'926 1'787'219

Total loans (after netting with value adjustments) 31.12.16 479'179 310'713 434'102 1'223'994

31.12.15 888'045 385'612 447'949 1'721'606

Off balance sheet

Contingent liabilities 2'246 119'928 204'831 327'005


Credit commitments 1'478 13'555 32'691 47'724

Total off balance sheet 31.12.16 3'724 133'483 238'902 376'109

31.12.15 11'825 250'982 79'228 342'036

in CHF 000'sGross debt

amount

Estimated liquidation

value of the collateral

Net debt amount

Individual value

adjustmentsImpaired loans / receivables

31.12.16 86'117 24'720 61'397 60'428

31.12.15 110'799 47'548 63'251 58'420


61 BANK

3 Breakdown of Trading portfolios and other Financial instruments at fair value

in CHF 000's 31.12.16 31.12.15Assets

Trading portfolios 143 98 Debt instruments, money-market instruments, money-market transactions 143 98- of which listed 143 98Equity interests

Precious metals and commodities Other trading assets

Other financial instruments at fair value

Debt instruments

Structure Products

Others

Total Assets 143 98 - of which determined by valuation model

- of which securities allowed for repo transactions in accordance with liquidity requirements


62 BANK

4 Presentation of derivative financial instruments

Trading instruments

in CHF 000's

Positivereplacement

values

Negativereplacement


Interest rate instruments

Forward contracts, including FRAs

Swaps

Futures

Options (OTC)


Foreign exchange / precious metals

Forward contracts 970 210 210'606 Combined interest rates / currency swaps

Futures

Options (OTC)


Equity interests / indices

Forward contracts

Swaps

Futures

Options (OTC)

Options (exchange-traded) 4'423

Credit derivatives

Credit default swaps

Total return swaps

First-to default swaps

Other credit derivatives

Other

Forward contracts

Swaps

Futures

Options (OTC)


Total before taking into consideration netting agreements

Total at 31.12.16 970 210 215'029 - of which determined by using a valuation model


63 BANK

in CHF 000's

Positive replacement

value(accumulated)

Negative replacement

value(accumulated)

Total after taking into consideration netting agreements

Total at 31.12.16 970 210

at 31.12.15 495 1'749

5 Breakdown by counterparties of derivative financial instruments

in CHF 000'sCentral

clearing partiesBanks and

securities dealers Other clientsPositive replacement values (after netting agreements) at 31.12.16 970

at 31.12.15 12 477 6

The Bank has no hedging instruments.

Trading instruments

in CHF 000's

Positivereplacement

values

Negativereplacement


Total at 31.12.15 495 1'749 247'940 - of which determined by using a valuation model

Book value Fair value

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Debt instruments 751'068 826'079 759'110 829'779

- of which held until maturity 571'840 826'079 579'513 829'779

- of which not held until maturity 179'228 179'597

Equity interests 359 346 358 346

Real estate

Total 751'427 826'425 759'468 830'125

- of which securities allowed for repo transactions in accordance with liquidity requirements 137'173 206'630

6 Breakdown of financial investments


64 BANK

in CHF 000's AAA AA A BBB BB to B Unrated

Book values at 31.12.16 89'802 120'635 162'151 201'420 171'339 6'080

at 31.12.15 198'454 123'957 123'055 190'182 162'470 28'307


7 Breakdown of the counterparty according to rating

8 Breakdown of other assets and other liabilities

Other assets Other liabilities

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Compensation account

Deferred income taxes recognised as assets 13'455 10'669

Others 8'647 7'669 15'273 20'750

Total 22'102 18'339 15'273 20'750

9 Disclosure of assets pledged or assigned to secure own commitments and of assets under reservation of ownership*

Book value Book valueEffective

commitmentsEffective

commitmentsin CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Assets pledged

Amounts due from banks 580 1'543 580 599

Financial Investments

Assets put under ownership reservation

Total 580 1'543 580 599

* Excluding securities financing transactions

65


BANKMount Kenya (Kenya)


66 BANK

10 Value adjustments and provisions and reserves for general banking risks

in CHF 000'sBalance at

31.12.15


purpose

Transformation of UK branch into

subsidiary ReclassificationsCurrency



charged to incomeReleases to

incomeBalance at

31.12.16Provisions for deferred taxesProvisions for pension fund obligations

Provisions for default risks

Provisions for other business risks 10'830 -359 -3'060 28 239 -7'047 631

Provisions for restructuring

Other provisions

Total provisions 10'830 -359 -3'060 28 239 -7'047 631

Reserves for general banking risks 489'580 15109 2'452 507'141

Value adjustments for default risks and country risks 66'356 -7'377 -23'232 2'202 1'794 32'818 -4'431 68'130

- of which value adjustments for default risks in respect of impaired loans 58'420 -7'377 -23'232 2'211 1'794 32'068 -3'456 60'428

- of which value adjustments for default risks in respect of financial investments 743 -9 750 -734 750

- of which value adjustments for latent risks 7'193 -241 6'952


67 BANK

in CHF 000'sBalance at

31.12.15


purpose

Transformation of UK branch into

subsidiary ReclassificationsCurrency



charged to incomeReleases to

incomeBalance at

31.12.16Provisions for deferred taxesProvisions for pension fund obligations

Provisions for default risks

Provisions for other business risks 10'830 -359 -3'060 28 239 -7'047 631

Provisions for restructuring

Other provisions

Total provisions 10'830 -359 -3'060 28 239 -7'047 631

Reserves for general banking risks 489'580 15109 2'452 507'141

Value adjustments for default risks and country risks 66'356 -7'377 -23'232 2'202 1'794 32'818 -4'431 68'130

- of which value adjustments for default risks in respect of impaired loans 58'420 -7'377 -23'232 2'211 1'794 32'068 -3'456 60'428

- of which value adjustments for default risks in respect of financial investments 743 -9 750 -734 750

- of which value adjustments for latent risks 7'193 -241 6'952


68 BANK

11 Bank's capital

31.12.16 31.12.15

in CHF 000's

Total nominal

value Quantity

Capital eligible for

dividends

Total nominal

value Quantity

Capital eligible for

dividend

Bank's capital / cooperative capital 150'000 1'500'000 150'000 150'000 1'500'000 150'000

- of which paid up

Total Bank's capital 150'000 1'500'000 150'000 150'000 1'500'000 150'000

Authorised capital

- thereof executed capital increases

12 Disclosure of holders of significant participations

31.12.16 31.12.15

in CHF 000'sAt nominal

valueAt nominal

value

Significant shareholders and groups of shareholders with voting agreements

voting shares

Gefan Finanz AG, Zug 150'000 100% 150'000 100%

non-voting shares

Benefical holdings: Gefan Finanz AG is 100% owned by a trust structure, which represents in equal shares the four branches of the Mohamedali Habib Family. No individual has a beneficial interest of 10% or more in the shares of Habib Bank AG Zurich.


69 BANK

15 Breakdown of credit commitments

in CHF 000's 31.12.16 31.12.15

Commitments arising from acceptances 19'057 19'457

Other credit commitments 28'666 51'104

Total 47'723 70'561

14 Breakdown of total assets by the credit rating of regions (risk domicile principle)

in CHF 000'sNet foreign exposures

at 31.12.16Net foreign exposures

at 31.12.15

AAA 488'146 10.8% 1'283'809 26.5%

AA+ to AA- 613'934 13.6% 263'894 5.4%

A+ to A- 2'655'488 58.8% 2'671'628 55.1%

BBB+ to BBB- 80'439 1.8% 120'412 2.5%

BB+ to B- 619'634 13.7% 430'859 8.9%

CCC 3'086 0.1% 0.0%

Unrated 51'789 1.2% 74'521 1.6%

Total 4'512'516 100.0% 4'845'123 100.0%


13 Disclosure of amounts due from / to related parties

Amounts due from Amounts due to

in CHF 000's 31.12.16 31.12.15 31.12.16 31.12.15

Qualified holdings 81'740 62'227

Group companies 61'295 25'852 9'445 34'286

Transactions with members of governing bodies 1'691 1'520 13'366 10'773


70 BANK

16 Breakdown of fiduciary transactions

in CHF 000's 31.12.16 31.12.15

Fiduciary investments with third-party companies 78'818 69'705

Fiduciary investments with group companies and affiliated companies 1'975

Fiduciary transactions from securities lending and borrowing which are carried out by the Bank acting under its own name but on behalf of clients 18'046 18'267 Total 96'864 89'947

17 Breakdown of the result from trading activities and the fair value option

in CHF 000's 2016 2015

Result from trading activities

Interest rate instruments (incl. funds) 64

Unrealised forex gains / losses on reserves held in foreign currencies 14'261 -3'238

Foreign exchange 8'421 11'945

Commodities / precious metals -258

Total 22'746 8'449

- of which from the fair value option applied to assets


71 BANK

18 Breakdown of personnel expenses

in CHF 000's 2016 2015

Salaries and additional allowances 41'782 50'961

- of which expenses related to share-based compensation and alternative forms of variable compensation

Social insurance obligations 4'266 5'399

Value adjustments for economic benefits or obligations arising from pension funds

Other personnel expenses 2'275 2'306

Total 48'323 58'666

19 Breakdown of general and administrative expenses

in CHF 000's 2016 2015

Office space expenses 5'314 6'413

Expenses for information technology and telecommunications 5'136 4'848

Expenses for motor vehicles, machinery, furniture and other equipment and operating lease expenses 472 1'069 Audit fees 1'310 1'437

- of which for financial and regulatory audits 1'192 1'424

- of which for other services 118 13

Other operating expenses 28'253 30'465

Total 40'485 44'231


72 BANK

20 Analysis of extraordinary income and expenses

in CHF 000's 2016 2015Extraordinary income

Release of provisions no longer required 25 Profit on sale of fixed assets 13 9 Recoveries and others 1'339 13 Total 1'377 22

Extraordinary expenses

Other -82 Total -82

21 Presentation of current taxes, deferred taxes and disclosure of the tax rate

in CHF 000's 2016 2015Income taxes 13'213 13'908Deferred tax expenses -2'786 -1'702Taxes 10'427 12'206

Average tax rate 21.5% 25.1%


73 BANK

Appropriation of profit / coverage of losses / other distributions

The Board of Directors will submit the following proposal to the General Meeting of Shareholders in respect of the distribution of profit.

in CHF 000's 31.12.16 31.12.15Profit / loss (result for the period) 37'138 34'784Profit carried forward / loss carried forward 73 89Distributable profit 37'211 34'873

Appropriation of profit

- Allocation to statutory retained earnings reserves -1'700 -1'800- Allocation to voluntary retained earnings reserves -17'500 -15'000- Distribution of dividend from distributable profit -18'000 -18'000Profit carried forward 11 73


74 BANK

Report of the Statutory Auditor

To the General Meeting ofHabib Bank AG ZurichZurich

Report of the Statutory Auditor on the Financial Statements

As statutory auditor, we have audited the accompanying financial statements of Habib Bank AG Zurich, which comprise the balance sheet, income statement, statement of changes in equity, and notes (pages 54 to 72 of the annual report) for the year ended 31 December 2016.

Board of Directors' ResponsibilityThe Board of Directors is responsible for the preparation of the financial statements in accordance with the provisions govern-ing the preparation of financial statements for Banks, the requirements of Swiss law and the company's articles of incorporation. This responsibility includes designing, implementing and maintaining an internal control system relevant to the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The Board of Directors is further responsible for selecting and applying appropriate accounting policies and making accounting estimates that are reasonable in the circumstances.

Auditor's ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Swiss law and Swiss Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control system relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control system. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting esti-mates made, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements for the year ended 31 December 2016 give a true and fair view of the financial position, the results of operations and the cash flows in accordance with the provisions governing the preparation of financial statements for Banks and comply with Swiss law and the company's articles of incorporation.

Report on Other Legal Requirements

We confirm that we meet the legal requirements on licensing according to the Auditor Oversight Act (AOA) and independence (article 728 CO and article 11 AOA) and that there are no circumstances incompatible with our independence.

In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system exists, which has been designed for the preparation of financial statements according to the instructions of the Board of Directors.

We further confirm that the proposed appropriation of available earnings complies with Swiss law and the company's articles of incorporation. We recommend that the financial statements submitted to you be approved.

KPMG AG

Ertugrul Tüfekçi Mirko LibertoLicensed Audit Expert Licensed Audit ExpertAuditor in Charge

Zurich, 25 April 2017

75


Addresses

Head Office and operation

Habib Bank AG ZurichWeinbergstrasse 59, PO Box 2258042 Zurich / Switzerland

Telephone: (+4144) 269 45 00Email: [email protected]

Branches

United Arab Emirates Habib Bank AG ZurichUmm Al SheifShaikh Zayed RoadP.O. Box 3306Dubai / UAE

Telephone: (+9714) 373 5200Email: [email protected]

Kenya Habib Bank AG ZurichHabib HouseKoinange StreetP.O. Box 30584, 00100 GPONairobi / Kenya

Telephone: (+25420) 334 1172 / 76 / 77 Email: [email protected]

Subsidiaries

Habib Canadian Bank Habib Canadian Bank Canada 918 Dundas Street East

Suite 400Mississauga, Ontario L4Y 4H9 / Canada

Telephone: +1 (905) 276 5300Email: [email protected]

HBZ Bank Ltd. HBZ Bank Ltd.South Africa 135 Jan Hofmeyr Road

P.O. Box 1536, WestvilleWandsbeck 3631 / South Africa


76


Subsidiaries

HBZ Services FZ LLC HBZ Services FZ LLCUnited Arab Emirates Dubai Outsource Zone

PO Box 186997Dubai / UAE

Telephone: (+9714) 387 07 00

Habib Metropolitan Bank Ltd. Habib Metropolitan Bank Ltd.Pakistan Spencer's Building

I.I. Chundrigar RoadKarachi-74200 / Pakistan

Telephone: (+9221) 111 14 14 14Email: [email protected]

Habib Bank Zurich (Hong Kong) Ltd. Habib Bank Zurich (Hong Kong) Ltd.Hong Kong 1701-05, 17 / F, Wing On House,

71, Des Voeux Road Central,Hong Kong


Habib Bank Zurich Plc Habib Bank Zurich PlcUnited Kingdom Habib House

42 MoorgateLondon EC2R 6JJ / UK


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Representative offices

Bangladesh Habib Bank AG ZurichBDBL Bhaban12 Kawran Bazar C/ADhaka 1215 / Bangladesh

Telephone: (+880) 2 550 13463Email: [email protected]

Hong Kong Habib Bank AG Zurich

1701-05, 17 / F, Wing On House,71 Des Voeux Road Central,Hong Kong


Pakistan Habib Bank AG ZurichSpencer's BuildingI.I. Chundrigar RoadKarachi-74200 / Pakistan

Telephone: (+9221) 111 14 14 14Email: [email protected]

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