Bank Audi's ratings affirmed

The FSR is constrained by the domestic and regional political environment, concentration to Lebanon sovereign debt, rising cost of risk, and increased cross border funding exposure to Turkey, although the latter is carefully controlled.

At the current level of FSR capital adequacy neither constrains nor supports the ratings. In this regard, credit exposure in Turkey (a sovereign that is rated higher than Lebanon) could improve the Bank's risk profile through lower risk-weighting of assets.

The Bank's Foreign Currency (FC) Long- and Short-Term Ratings are affirmed at 'B' and 'B', constrained by the Sovereign Ratings of Lebanon. The Support Level is affirmed at '3', reflecting the high likelihood of official support from Banque du Liban (BdL) in case of need, given Audi's systemic importance and BdL's record of assisting banks. The Outlook on all Ratings remains 'Stable'.

Bank Audi has taken a major step forward as a regional universal bank with the successful launch of its greenfield operation in Turkey towards the end of last year. Odeabank is off to a very good start and expectations are high. Turkey represents a strategic opportunity and Audi aims to soon develop it into its second largest regional franchise. Aggregate growth in loans and deposits improved last year, at the same time that Audi continued to scale down its operations in Syria and to carefully manage its exposures across MENA.

Despite the turmoil in Syria, the unsettled conditions in Egypt, and weaker economic growth in Lebanon and Jordan, asset quality and loss reserve coverage improved through write-offs and an increase in loan-loss provisions. Capital adequacy was restored to a better level through retained profits and an increase in preferred share capital. This has placed the Bank in a position to pursue its growth plans on a sound basis. A further endowment of preferred share capital has already been approved for the first half of this year, which will strengthen Audi's buffers against credit and market risks.

Operating profitability improved based on an increase in net interest margins, faster growth in loans, and sustained income from trading activities and gains on Forex structural positions at subsidiaries. However, growth in net profit remained modest due to the increase in loss provisions, and was supported by gains on sale of the group's insurance subsidiary. The Bank maintained its return on average assets (ROAA) profitability at a peer group best level.

With slower economic growth in Lebanon for a second consecutive year, the public debt is again rising faster than GDP and the trend in sovereign debt metrics has reversed. The country's external liquidity on a consolidated basis remains robust, although not as strong as suggested by headline figures or ratios. The internal political balance in Lebanon remains a very fine one, as spillover risks from Syria remain high. Any political risk event in the region that threatens stability within Lebanon could adversely affect deposit growth and refinancing of public sector debt, as well as the exchange rate peg on which the banking system is so crucially dependent.

With end 2012 total assets of $31.3bn, Audi is the largest Lebanese bank. The Bank's shareholder base comprises members of the families that founded the Bank, as well as other Lebanese and Arab nationals. As a result of growth in both its domestic market and in its international operations, Audi is now a regional universal bank with a leading position in Lebanon, an established presence in Europe, and a wide MENA and Turkey footprint. The Bank's expansion strategy continues to aim at diversifying its business franchise and profitability within this geographic context, while consolidating and strengthening its domestic leadership in Lebanon.