Complex Made Simple

Bank Audi consolidated activity highlights as at end-December 2014

In 2014, the Lebanese economy has witnessed a relative improvement in performance, though much lower than its potential capacity, within the context of a precarious domestic/regional environment. Real growth has indeed improved but remains modest, as suggested by the average growth in BDL coincident indicator which reported 3.3 percent in the first 10 months of 2014, reflecting the average performance of main real sector indicators.

Amidst this environment, the financial sector performance remained sound, confirming the sustained resilience of the banking industry. Within the context of a sustained financial inflows towards Lebanon reaching US$ 16 billion in 2014, the banking sector reported a satisfactory annual growth of 7.2 percent in deposits (i.e. an increase by close to US$ 7 billion) and 7.9 percent in loans (i.e. an increase exceeding US$ 3 billion) by end-November 2014, while profitability stagnated at its previous year’s level.

At the regional level, the performance of the MENA region in 2014 was mixed. According to the IMF, the region as a whole is set to grow by 2.6 percent in full-year 2014, but this average masks a big difference between the high-income and developing countries of MENA. At the banking level, the MENA region has been reporting a satisfactory performance on the overall, as the annualized growth rates in deposits of 10.6 percent and in loans of 8.7 percent by October 2014 remain sound. But such a banking sector growth in the MENA region is mainly driven by oil exporters, while most oil importers barely saw their deposit and loan bases growing. In Turkey, the other market of regional presence for Bank Audi, economic performance remained sound, with an average real GDP growth of 3.0 percent estimated for 2014 coupled with sound growth in monetary and banking aggregates at large.

Within this context, Bank Audi’s performance in 2014 confirms the suitability of the Group’s diversification strategy to the prevailing operating environment and its aptness for growth, with consolidated net profits rising by 15 percent relative to 2013 to reach US$ 350 million, of which 42 percent in entities outside Lebanon. This performance stemmed in particular from the reinforcement of the earning generation capacity in the main development pillars of the Group, mainly in Turkey, but also in Lebanon, Egypt and the private banking entities. This follows the allocation of US$ 138 million of consolidated net loan loss provision charges, reinforcing the Bank’s asset quality at large. In parallel, consolidated assets grew by 15.9 percent, to exceed, for the first time, the US$ 40 billion threshold reaching US$ 42 billion at end-December 2014, almost half of it booked in entities outside Lebanon. The latter reinforces the Group’s ranking among the top 20 Arab banking groups.

In details:

• The Bank’s consolidated assets increased by US$ 5.8 billion in 2014, from US$ 36.2 billion at end-December 2013 to US$ 42 billion at end-December 2014, reaching US$ 52.1 billion when accounting for fiduciary deposits, security accounts and assets under management. Most of the consolidated assets growth was generated respectively and by order of importance by the entities in Turkey, Egypt and Lebanon. In spite of the negative impact of the depreciation of local currencies versus the US dollar in a number of countries of presence, the contribution of entities outside Lebanon to consolidated assets reached 47 percent at end-December 2014, bearing witness to Management’s success in reaching its set target of a balanced activity breakdown between Lebanon and abroad. This achievement is even more important when considering that 33 percent of consolidated assets are booked in investment grade countries, reinforcing the overall quality of the Bank’s assets.

• In parallel, consolidated customers’ deposits increased by US$ 4.7 billion, equivalent to a growth of 15.2 percent, achieving a good performance relative to a number of large regional banks. This growth was principally driven by deposits increases in entities in Turkey, Egypt and Lebanon. Accordingly, consolidated customers’ deposits, exceeded at end-December 2014 the deposit bases of a number of leading regional banks, reaching US$ 35.8 billion at end-December 2014, of which 45 percent from entities outside Lebanon.

• Consolidated shareholders’ equity rose by US$ 647 million in 2014 as a result of the completion of the US$ 300 million capital increase at end-September 2014 in spite of the tough regional environment, bearing witness to the confidence of existing and new shareholders in the Group and of the additional US$ 236 million of reserves for revaluation of fixed assets booked in accordance with BDL Intermediary Circular No. 44, within the context of the usual changes in equity. Consequently, consolidated shareholders equity of Bank Audi reached US$ 3.3 billion at end-December 2014 and US$ 3.8 billion when adjusting for the issued subordinated loans, leading to a Basel III capital adequacy ratio of close to 13.7 percent, as compared to an 11.5 percent regulatory minimum requirement.

• Consolidated loans rose from US$ 14.7 billion at end-December 2013 to US$ 17.2 billion at end-December 2014, equivalent to an increase by US$ 2.5 billion. This increase was met with an allocation of US$ 138 million of consolidated net loan loss provision charges to reinforce the Group’s loan quality. Within the context of a persisting challenging environment domestically and regionally, the ratio of gross doubtful loans to gross loans reached 3.1 percent at end-December 2014, while the coverage of those loans by specific loan loss reserves rose to 71.6 percent and to 109 percent when including collective provisions and real guarantees. Accordingly, the ratio of net doubtful loans to gross loans improved from 1.0 percent at end-December 2013 to 0.9 percent at end-December 2014. Still, the ratio of gross doubtful loans to gross loans of Bank Audi remains low when compared to the sector averages in Lebanon (3.2 percent), the MENA region (4.7 percent) and the world (6.7 percent).

• Consolidated primary liquidity placed with central banks and foreign banks achieved a record high level, reaching US$ 16.2 billion, the equivalent of 45.2 percent of customers’ deposits, a high level when compared to regional and global averages.

• Bank Audi’s net earnings after provisions and taxes reached US$ 350 million in 2014 as compared to US$ 305 million in 2013, which represents a 15 percent growth year-on-year. This performance stems from a 23.6 percent growth in total revenues, primarily as a result of the exponential growth of Odea Bank’s revenues within the context of a reinforcement of the revenue generation in the other development pillars of the Group. Revenue growth in Turkey allowed Odea Bank to report positive net profits after provisions and taxes starting the month of May 2014, building up exponentially growing net profits in accordance with the Bank’s targets for its Turkish subsidiary.

• Based on such results, the Bank’s profitability ratios were reinforced with the return on average assets achieving 0.9 percent and the return on average common equity increased from 12.6 percent to 13.6 percent. In parallel, the Bank’s common book value per share stood at US$ 6.95. Subsequently, and based on a common share price of US$ 6 at the closing of 14/10/2014, the Bank’s common shares were trading at 0.9x book value, reflecting very low multiple relative to regional peer banks’ multiples.

The 2014 results confirm the Group’s good mastery over the operating conditions in the various countries of presence, mainly in Turkey where the subsidiary is well placed to achieve an exponential growth in net profits in line with preset targets. Those results also confirm the Group’s high financial flexibility resulting from the diversification of activity and profit sources, while bearing witness to the commercial growth momentum that represents a source of future recurrent revenues. Subsequently, the Group looks positively to the outlook, reiterating its commitment to actively meet the needs of both businesses and individuals in the various countries of presence.