Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Bank Audi S.A.L.’s (Audi) Financial Strength Rating (FSR) at ‘BBB-’.
The Bank’s Foreign Currency Long- and Short-Term Ratings are both affirmed at ‘B’, constrained by the ratings assigned to the sovereign (‘B’/‘B’/‘Stable’). Given Audi’s systemic importance and Banque du Liban’s (BdL) record of assisting banks, the Support Level is affirmed at ‘3’, reflecting the high likelihood of official support in case of need. The Outlook on all ratings remains ‘Stable’.
The FSR reflects Audi’s strong franchise and international presence, good asset quality, resilient net interest margin and comfortable liquidity, the latter subject to systemic risks.
The FSR is constrained by concentration to Lebanon sovereign debt and related interest rate and maturity mismatches, the relatively low CET1 ratio, moderate operating profitability, the domestic and regional political environment, and slow economic growth in Lebanon.
Audi took a major step forward as a regional universal bank with the successful launch of Odeabank, its greenfield operation in Turkey, towards the end of 2012. In 2014, Odeabank continued to register strong volume growth in both loans and deposits and this served to significantly further diversify Audi’s business and risk profile.
Turkey represents a strategic market and has been established as Audi’s second largest regional franchise. Overall growth in loans and deposits was also supported by better than expected performance from Audi’s subsidiary in Egypt, at the same time that Audi continued to scale down its operations in Syria and carefully manage its exposures across MENA.
Despite continued slow economic growth in Lebanon and challenging conditions in other MENA markets that led to a rise in non-performing loans (NPLs), Audi maintains a good quality loan portfolio and a strong risk management framework. The Bank has further diversified its risk assets geographically and across customer and industry sectors, with sustained growth in gross loans leading to an improved NPL ratio. Loan loss reserve (LLR) coverage has increased to a sound level following an increase in loan-loss provisions.
Although at the current level LLR coverage remains adequate given the profile of the loan portfolio, going forward, a higher level of precautionary provisioning seems necessary to cover the cost of risk in Turkey where the loan portfolio is still unseasoned. Despite moderate operating profitability, Audi’s risk absorption capacity could comfortably support higher risk charges.
Gross income rebounded on the back of a strong rise in net interest income, following the rapid expansion of the loan book in Turkey, as well as in Egypt to a lesser extent. At the same time, non-interest income was boosted by a large increase in fee and commission income. Operating profit recovered despite the ongoing growth in operating costs (mainly for building the franchise in Turkey).
Despite the hike in risk charges, net profit expanded notably, while the return on average assets (ROAA) was maintained at an acceptable level. Operating profit is expected to improve further in the current year as asset utilisation in Turkey and cost efficiency across the Group both improve.
Risk weighted assets expanded further due to the build up of the loan portfolio in Turkey. The Bank shored up its regulatory capital by issuing USD300mn of common equity in September 2014. In March 2014, USD150mn of Tier 2 Capital had been obtained from the IFC – which also subscribed in the common share capital issuance.
As a result, the capital adequacy ratio (CAR) has improved, strengthening Audi’s buffers against credit and market risks. However, despite the common share capital increase, the CET1 ratio remains relatively low (although comfortably above the regulatory minimum) and exposed to substantial Forex translation risk.
Liquidity remains comfortable, with key ratios remaining broadly unchanged, despite the expansion in the Bank’s loan portfolio. As is the case with other local banks, liquidity must be viewed in light of the systemic liquidity and interest rate risks which are characteristic of the Lebanese banking system. With only moderate economic growth in Lebanon for a third consecutive year, sovereign debt metrics continue to weaken.
The country’s external liquidity on a consolidated basis remains robust, although not as strong as suggested by headline figures or ratios, because of the BdL’s foreign currency liabilities to commercial banks and its traditional role in supporting the public debt market.
Although the security situation seems to have improved since the new Government was appointed in February 2014, the internal political balance in Lebanon remains a very fine one; any political risk event in the region threatening 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 2014 total assets of USD42 billion, 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.