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Management Discussion And Analysis

4.0. 2013 Activity and Performance Analysis

4.1. Business Overview in 2013

The evolution of the Group’s balance sheet in 2013 reflects primarily the strong fundamentals of its transformation strategy, existing business opportunities, as well as the overall risk appetite of Management allowing the Group to held up and adapt to the persisting prevailing challenging environment. A detailed performance analysis of the consolidated operations in 2013 across the main development pillars of the Group reveals that it was driven by opposite trends as follows:
  • In Lebanon: the Bank continues to favour a margin focus over volume growth policy, justified by the dynamics of the domestic market, where it holds a leading position aimed at reinforcing asset and liability management efficiency through an additional decrease in the cost of LBP deposits and an improvement in the yield on the various asset classes;
  • In Turkey: Odeabank, the fully owned subsidiary, achieved a solid activity growth in its first year of operations and succeeded, in just 14 months, to rank 14th among the 33 operating commercial banks in Turkey with an assets’ market share of close to 1%. Management policy continues to revolve around securing over the medium term an established positioning in the Turkish market, which still enjoys a large size and high levels of growth in spite of short-term volatility;
  • In Egypt: the Bank registered a positive contribution to activity and earnings growth despite the persisting political uncertainties prevailing in the country, supported by a flexible asset and liability management policy allowing to seize opportunistic deals;
  • Private Banking business line: Management accelerated the restructuring plan underway, allowing for a steady convergence of the Private Banking entities towards a unified group, leveraging on existing synergies and pooling resources to lay the foundation for a sustained development of the Private Banking business line over the medium term;
  • In addition, Bank Audi continued deleveraging in Bank Audi Syria whose assets represented less than 1% of the consolidated position at end-December 2013;
  • The Bank also sustained the resilience of the loan quality across entities despite persisting spillover effects of regional developments.

4.2. Balance Sheet Management

The Bank’s consolidated assets rose from USD 31.3 billion at end-December 2012 to USD 36.2 billion at end-December 2013, representing an increase by USD 4.9 billion, essentially driven by a significant USD 5.5 billion growth at the level of Odeabank, testifying once again to the Group’s ability to deliver strong volume growth and value added expansions. In parallel, consolidated assets under management (fiduciary deposits, security accounts and assets under management) increased by USD 841 million in 2013 to reach, at end-December 2013, USD 9.3 billion, raising as such the total assets and assets under management to USD 45.5 billion at the same date. Beyond the important growth dimension, the Bank has witnessed an improvement in its credit profile. In fact, the share of assets booked in investment grade countries more than doubled in 2013 from 19% at end-December 2012 to 32% at end-December 2013, a level unparalleled among Lebanese banking groups at large.

The below table shows the evolution of Bank Audi’s financial position at end-December 2013 as compared to end-December 2012:

Balance Sheet (USD Million) / Breakdown Between Lebanon And Abroad

The growth in consolidated assets of Bank Audi bears witness to its capacity to adapt to the rapid changes in the post Arab Spring regional operating environment, while also falling within the transformation strategy adopted by Management, which revolves around securing over the medium term an established positioning in the Turkish market, still enjoying a large size and high levels of growth in spite of short-term volatility. In just 14 months of activity, Odeabank succeeded to build USD 7.5 billion of assets of which USD 5.3 billion of loans, funded by USD 5.8 billion of customers’ deposits, throughout a network encompassing 31 branches. Subsequently, the contribution of foreign entities in consolidated assets rose from 32.4% at end-December 2012 to 42.6% at end-December 2013, whereby assets of Odeabank represent 20.9% of the total.

The table below presents a summary of the evolution of main financial indicators across the three development pillars markets of the Group at end-December 2013 as compared with end-December 2012, with an insight on Bank Audi Syria’s performance over the same period:


Funding Sources

The Bank’s funding resources continue to be principally driven by customers’ deposits accounting for 85.9% of the Bank’s total liabilities at end-December 2013, while the remaining are accounted for by bank deposits (3.8%), other liabilities (1.9%), subordinated debt (1%) and shareholders’ equity (7.4%).

Customers’ deposits are composed primarily of retail and individual deposits (72.3%), while corporate and commercial customers’ deposits constitute supplementary sources of funding (27.7%).

A detailed analysis of the evolution of consolidated customers’ deposits in 2013 reveals that deposits moved from USD 26.8 billion at end-December 2012 to USD 31.1 billion at end-December 2013, increasing by USD 4.3 billion, i.e. the equivalent of 16%. Structure wise, this increase was particularly skewed towards time and saving deposits, making up for 89.8% of the total increase, underscoring reinforced stability of deposits. At end-December 2013, time deposits represented 69.9% of total deposits followed by 14.8% for sight deposits, 10% for saving deposits, 1.6% for related parties’ deposits and 3.7% for other deposits. This is to be compared to 74%, 16.1%, 4.3%, 1.7% and 3.9% respectively at end-December 2012.


By geography, the increase in customers’ deposits is essentially owed to Odeabank which registered an increase by USD 4.4 billion amid a positive contribution by USD 140 million from European entities and by USD 147 million from MENA entities. Accordingly, foreign entities made up in 2013 for an increase in consolidated deposits by USD 4.7 billion. In real terms, and adjusted to the impact of the currency depreciation in several countries of presence, deposits of foreign entities increased by USD 5.2 billion.

On the other hand, deposits of Lebanese entities contracted by USD 387 million in 2013, representing a decrease by USD 85 million at Group Audi Lebanon and by USD 302 million at Audi Private Bank, the majority of which have been transferred to assets under management. By currency, the USD 85 million decrease in deposits at Group Audi Lebanon represents a decrease by USD 652 million for deposits denominated in Lebanese Pounds as a result of the margin focus strategy adopted by Management and favouring decreasing the average cost of deposits to improve interest income over volume growth. This strategy led to a decrease in the average cost of Lebanese Pounds deposits by 49 basis points in 2013, driving an improvement in LBP spread by 54 basis points, the equivalent of USD 32.2 million of additional interest income. Achieving a similar increase in net interest income while sustaining the average cost of deposits in LBP to its end-December 2012 level would have entailed increasing the deposits base in LBP by USD 1.3 billion on average.

On the other hand, and in spite of the sustained margin focus strategy, deposits in foreign currencies of Group Audi Lebanon, representing the main funding source for lending, increased by USD 567 million and by USD 1,017 million when adjusting to the USD 100 million incremental preferred shares issued in May and the USD 350 million (USD 356 million when accounting for USD 6 million of accrued interest) of subordinated debt issued in September 2013, both marketed through the Bank’s network. Management’s bottom line driven policy is mainly justified by the significant gap in deposits in foreign currency relative to direct peers in Lebanon, reaching USD 2.9 billion with BLOM Bank and USD 6.5 billion with Byblos Bank.

On the overall, the market share of Group Audi Lebanon contracted slightly from 14.4% at end-December 2012 to 13.1% at end-December 2013. In parallel, the share of foreign currency deposits in Group Audi’s deposits moved from 71.2% at end-December 2012 (including 54.7% in USD) to 74.7% at end-December 2013 (including 55.8% in USD), in line with the trend of commercial banks in Lebanon where the share of foreign currency deposits moved from 64.8% to 66.1% at end-December 2013.

In parallel, funding sources were also reinforced with the issuance, in September 2013, of USD 350 million subordinated unsecured bonds which are expected to be repaid on October 16, 2023, unless previously redeemed by the Bank or accelerated, with such early redemption or acceleration being subject to the approval of the Central Bank of Lebanon. The notes bear an interest rate of 6.75% per annum payable on a quarterly basis, subject to the availability of free profits in accordance with the Central Bank’s Basic Circular No. 6830, as applicable at the time of the issuance. Please refer to Note 39 in the Consolidated Financial Statements for further details.

The issuance of the subordinated bonds, which are included in the Tier two capital, mirrors Management’s efforts to maintain current and projected capital ratios comfortably compliant with regulatory requirement amid high growth in risk-weighted assets. On the same line, on March 27, 2014, Bank Audi closed the issuance of USD 150 million of subordinated loans with the IFC, a member of the World Bank Group, and the IFC Capitalisation Fund, managed by the IFC Asset Management Company, further strengthening the solidity of the Bank’s capital base.

Asset Utilisation (Balance Sheet Allocation)

The analysis of the financial position at end-December 2013 demonstrates that the Group continues to sustain a strong balance sheet, highly liquid, diversified and conservative. Primary liquidity accounted for 40.4% of total deposits and the loans to deposits ratio stood at 47.3% at the same date, displaying our ample capacity to grow loans while continuing to optimise liquidity management.

Although the asset liability management at Bank Audi favours placements in activities with the highest positive impact on the Group’s profitability, balance sheet allocation is determined by specific limits set internally and based on Management’s risk appetite and underlying volumes. Covering lending, placements with financial institutions and investment in portfolio securities, these limits are applied by all entities over and above the abidance to local regulations requirements. As per the Group’s Corporate Governance guidelines (Article 2.8.), limits are subject to annual review by the Board of Directors; meanwhile, Management may submit on an ad hoc basis to the Board of Directors for approval, changes in the limits in response to changing business or market conditions. On a day-to-day basis, the responsibility of monitoring the limits lies within the Group Credit Risk Department.

In what follows, we analyse the evolution of the various assets classes and their respective key indicators at end-December 2013 relative to end-December 2012.

Consolidated Loan Portfolio

Consolidated net loans moved from USD 10.4 billion at end-December 2012 to USD 14.7 billion at end-December 2013, achieving an increase by USD 4.3 billion, corresponding to a growth of 41.1%. A flow analysis by entity reveals increases by USD 4,335 million in Turkey, USD 317 million in the Lebanese private sector and USD 133 million in European entities within the context of a decrease in loans booked in Lebanon for non-residents by USD 460 million and in loans in MENA entities by USD 42 million (net increases by USD 75 million in Bank Audi Jordan and USD 34 million in Bank Audi Egypt totally offset by decreases in Bank Audi Syria by USD 140 million and in other MENA entities by USD 11 million). Adjusted to the impact of the currency depreciation, loans of Bank Audi Syria decreased in real terms by USD 33 million, while those of Bank Audi Egypt increased by USD 158 million.

At end-December 2013, loans to the Lebanese private sector represented 33.2% of the total loan portfolio, as compared to 36% for loans booked in Turkey, 7.8% for loans booked in Lebanon for non-residents, 7.2% for loan in European entities and 15.8% for loans in the MENA entities, of which Bank Audi Syria accounts for 0.88% only, equivalent to USD 130 million, broken down over USD 25 million in foreign currencies secured by corporate guarantees and USD 105 million denominated in Syrian Pounds.

The increase in consolidated loans translated into a further improvement in the loan-to-deposit ratio from 38.9% at end-December 2012 to 47.3% at end-December 2013. In parallel, in the last quarter of 2013, Management launched an extensive efficiency workshop encompassing a detailed analysis of the profitability of each lending segment across main entities, while taking into account the return on the risk adjusted capital as per Basel III requirements. Management’s strategy, going forward, aims at improving loan yields by trading off loan structure by type, credit risk and yields, paving the way to an improvement in the overall RORAC of the loan portfolio.

The following analysis covers the breakdown of the consolidated loan portfolio by customer type, economic sector, maturity, currency and collaterals.


Loan Breakdown by Customer Type

At end-December 2013, the consolidated loan portfolio was broken down over 61.9% corporate loans, 14.6% loans to SMEs, 14.1% consumer loans and 9.5% Individual and private banking loans, as compared to a split of respectively 56.4%, 16.6%, 13.8% and 13.2% at end-December 2012. A detailed analysis of loans flows in 2013 reflect that corporate loans accounted for 75.2% of the increase in the consolidated portfolio, mainly driven by the growth in Turkey, followed by 14.8% for consumer loans, 9.5% for loans to SMEs and 0.5% for sole proprietorship and Private Banking facilities. Going forward, the growth of SMEs loans yielding relatively higher return will be among the key priorities across the pillar development markets, Lebanon, Turkey and Egypt.


Loan Breakdown by Economic Sector

The concentration of the loan portfolio by economic sector remains within BOD’s approved concentration limits relative to each of the loan portfolio and consolidated equity. At end-December 2013, the largest concentration by sector was to manufacturing industries (19.2%), trade (14.4%), consumer loans (14.1%) and contractors (12%), with no major changes to report except for the share of contractors in the total which increased to 12%, driven by the contribution of Odeabank in Turkey, although this increase remains within the risk appetite of the Group.


Loan Breakdown by Maturity

The maturity profile of the consolidated loan portfolio has evolved in 2013 to the advantage of medium to long-term facilities. Indeed short-term facilities, with maturities of less than one year reflecting mainly working capital financings to customers, represented, at end-December 2013, 37.3% of the consolidated loan portfolio as compared to 51.4% at end-December 2012. In parallel, medium-term and long-term loan tenors increased from respectively 12.1% and 36.5% at end-December 2012 to 18.5% and 44.2% respectively at end-December 2013, reflecting the maturity structure of Odeabank’s loan portfolio in Turkey, as well as the sharp increase in housing products across main entities of the Group.


Loan Breakdown by Currency

The charts below highlight the breakdown of the loan portfolio by currency. Although USD remains the dominant currency at end-December 2013 standing at 51.3%, its share has decreased by 4.4% from 55.7% at end-December 2012, reflecting the direct impact of the launch of the new subsidiary in Turkey with 52.2% of its loans denominated in Turkish Lira and the remaining in foreign currencies mostly in USD.


Loan Breakdown by Collateral

Notwithstanding the fact that lending decisions rely primarily on the availability and sustainability of cash flows as a first source of repayment, Bank Audi’s loan portfolio remains adequately collateralised. At end-December 2013, secured loans represented more than 43.3% of the total loan portfolio. Loans covered by personal guarantees represented 19.4% of the portfolio as compared to 17.1% at end-December 2012.

Evolution of Contra-accounts

As a result of the political and economic turmoil, the Bank’s Trade Finance activities were generally driven by Odeabank amid non-conductive operating conditions over the period. Outstanding letters of credit increased by 61.3% in 2013 to USD 379 million at end-December 2013 from USD 235 million at end-December 2012, while outstanding letters of guarantee decreased by 13.6% in 2013 to USD 1,742 million at end-December 2013 from USD 1,534 million at end-December 2012.

Loan Quality

The loan portfolio of Bank Audi displayed in 2013 strong resilience in the face of the persisting challenging environment across main entities. The gross doubtful loans to gross loans ratio represented 2.8% at end-December 2013, almost the same level as at end-December 2012, as compared to an average of 5.9% of the top Lebanese banking groups included in the Alpha group of banks and 5.2% for the MENA region, 6.6% in emerging markets and 6% in the world. At the same date, coverage of those loans by specific and collective loan loss provisions stood at 95% and would exceed the 100% threshold when adjusting to real guarantees, reaching 110%.


In volume terms, gross doubtful loans increased by USD 132 million, arising mainly in Lebanese entities (USD 104 million) triggered by Management’s decision in the month of December 2013 to downgrade a number of corporate loans in Lebanon unrelated to any Lebanese risk but booked in Lebanon for non-residents. In parallel, gross doubtful loans increased in Bank Audi Egypt by USD 6.8 million and by USD 5.7 million in Bank Audi Jordan, offsetting contractions by USD 4.5 million in Bank Audi France and USD 1.7 million in Bank Audi Syria.

The increase in gross doubtful loans was met with an allocation of net loan loss provisions by USD 90.3 million in 2013 which contributed to increase specific provisions by USD 34.3 million and collective provisions by USD 20.7 million, while USD 9.5 million were allocated to write-offs and the remaining USD 25.8 million accounted for by the impact of foreign exchange fluctuations. Total collective provisions reached USD 131.2 million at end-December 2013, the equivalent of 0.9% of the consolidated net loans portfolio, broken down over USD 60.2 million in Lebanese entities (of which USD 18 million earmarked for Syria), USD 2.9 million in entities in Europe, USD 14.2 million in Bank Audi Egypt, USD 27.1 million in Bank Audi Syria, USD 13.8 million in Bank Audi Jordan and USD 12 million in Odeabank. In parallel, specific provisions reached USD 216.8 million, broken down over USD 143.6 million in Lebanese entities, USD 12.3 million in entities in Europe, USD 28.5 million in Bank Audi Egypt, USD 27.4 million i Bank Audi Syria, USD 28.2 million in Bank Audi Jordan and USD 4.5 million in Odeabank.

The detailed analysis of the evolution of loan quality indicators in pillar markets, Lebanon – Egypt – Turkey, and in Syria still witnessing tough political, economic and security conditions highlights the following:


In Syria, gross doubtful loans to gross loans ratio increased from 16.6% at end-December 2012 to 27.3% at end-December 2013, owing to a contraction of the gross loan portfolio by USD 133 million within an decrease in gross doubtful loans by USD 1.7 million, reaching at end-December 2013 USD 51.7 million. Doubtful loans in Syria are covered by specific loan loss reserves of USD 32.2 million, to be added to USD 27.1 million of collective provisions and USD 25.4 million of collaterals. Subsequently, doubtful loans coverage by specific and collective provisions represented at the same date 115% and would exceed 150% when including real guarantees. Going forward and in light of the above, Management does not expect any additional increase in doubtful loans in Bank Audi Syria to require any additional provisions.

Changes in Portfolio Securities

Portfolio securities increased by USD 928 million reaching at end-December 2013 USD 11.1 billion as compared to USD 10.2 billion at end-December 2012, corresponding to a growth by 9.1%. At end-December 2013, portfolio securities represented 30.6% of consolidated assets and 35.6% of consolidated deposits. Most of the increase was accounted for by Eurobonds, highlighting Management’s opportunistic policy to benefit from the increased yield curve on those investments.

The table below highlights the breakdown of portfolio securities at end-December 2013 as compared to end-December 2012:


Lebanese Bond Portfolio

At end-December 2013, Bank Audi’s exposure to Lebanese sovereign Eurobonds in foreign currency stood at USD 3,504 million, of which USD 1,202 million of bonds whose risk have been ceded to customers, thus leaving a net exposure of USD 2,302 million, representing 20.8% of the Bank’s total portfolio securities and 9.1% of adjusted foreign currency denominated customers’ deposits .

Non-Lebanese Securities

In parallel, the international securities portfolio increased in 2013 by USD 215 million, reaching at end-December 2013 USD 2,786 million, an increase principally driven by non-Lebanese governmental securities reaching USD 2,121 million within a stable USD 665 million for other international fixed income securities.

Well diversified across sectors, placements in these other international fixed income securities are skewed towards highly rated financial institutions, which accounted, at end-December 2013, for 56% of the total international bond portfolio while corporate issuers accounted for 32% and sovereign names for 12% of the total. The relatively high concentration on banks is mitigated by good issuer diversification and relatively short tenor maturities (under 2 years), making these investments somewhat similar to ordinary placements with banks in terms of implied risk profile and market risk exposure.

In terms of geographical allocation, 36% of international fixed income bond positions relate to issuers domiciled in developed markets (mostly G10), 50% in GCC markets, and a relatively low 14% in other emerging markets.

The charts below show the breakdown of the other international bond portfolio by geographical location and by ratings:


This portfolio enjoys a high average rating as 91% of the portfolio is invested in bond issues rated A- or better. The highest single issuer position in this portfolio represents 6% of the total, while the second largest represents 5% of the total, underscoring a good level of diversification. At end-December 2013, the top exposure, representing an investment by USD 42 million, was held in an AA rated issuer.

Changes in Primary Liquidity

The increase in portfolio securities was in part funded by primary liquidity decreasing over the same period by USD 480 million to reach at end-December 2013 USD 9.3 billion, representing 25.8% of consolidated assets. Including BDL’s certificates of deposits, primary liquidity reaches USD 12.6 billion, representing 40.4% of customers’ deposits, still an elevated level when compared to regional and global averages.


Structure wise, primary liquidity remains mainly concentrated on central banks’ placements, whose share increased slightly from 63.9% at end-December 2012 to 65.3% at end-December 2013. The remaining 34.7% are accounted for by bank placements, composed of money market deposits, nostros and short-term loan participations and reverse repo balances (down from 36.1% at end-December 2012).

Money markets placements and nostros with banks, representing USD 3 billion or 32.3% of primary liquidity at end-December 2013, are mostly placed with highly rated and financially sound banks, mainly based in low risk OECD and GCC countries characterised by high levels of solvency and financial and monetary stability. Over 60% of these placements are held in banks rated A- or better.

The charts below show the breakdown of money market placements held as at end-December 2013 by ratings and geographic location:


Exposures to banks are continuously monitored by the Risk Management department in close coordination with Group Financial Institutions and Correspondent Banking department (Group FI). Regular portfolio reviews are conducted throughout the year to assess the Bank’s risk profiles and ensure that related positions remain within the overall risk appetite of the Group. During these reviews, specific attention is paid to concentration risk levels to ensure that these remains well under control.

4.3. Results of Operations

Bank Audi’s net earnings reached USD 305 million in 2013, against USD 361 million in 2012 before the exceptional profits related to discontinued operations, decreasing by 15.6% mainly due to the initial launching stages of the Turkish banking subsidiary, deploying in 14 months 31 branches and employing 1,100 staff with the subsequent normal time lag between immediate operating expenses and expected revenues. When adjusting the Group’s net earnings to Odeabank’s USD 44.5 million negative results and the forgone yield on the invested amount in Turkey, Bank Audi would have recorded a net earnings growth exceeding 4% and reaching more than USD 375 million amidst challenging domestic and regional operating conditions, reflecting the Group’s sustained large earnings’ flexibility.

The table below presents an overview of Bank Audi’s consolidated financial results in 2013 as compared to 2012:

Bank Audi's consolidated financial results in 2013 as compared to 2012
1 Includes interest revenues from financial assets or liabilities at fair value through P&L.

A detailed analysis of the components of net profits shows that the USD 56.2 million decline stems from a decrease in total revenues by USD 30.1 million within an increase in the cost base (general operating expenses, provisions and tax expenses) by USD 26.1 million justified predominantly by the launch of the Turkish entity. Total revenues flows result from an increase in interest income by USD 74.7 million totally offset by a contraction in non-interest income by USD 104.8 million.

The table below highlights the evolution of results across the three pillar markets of the Group, and Bank Audi Syria:


Evolution of Interest Income

The increase in consolidated interest income was mainly driven by a quantity effect (USD 91.9 million) with average assets growing year-on-year by 15.4%, totally offsetting the USD 17.2 million price effect following the contraction in consolidated spread by 5 basis points. SPREAD EVOLUTION (USD MILLION)

By entities, interest income of Lebanese entities (excluding Audi Private Bank sal) rose to USD 362.6 million, representing 53.9% of the consolidated interest income in 2013 as compared to 58.5% in 2012 with USD 349.8 million. Subsequently, interest income of Lebanese entities increased by USD 12.8 million, attributed essentially to a price effect as a result of the margin focus strategy translating in an overall spread widening by 3 basis points.

By currency, the increase is driven by interest income denominated in Lebanese Pounds rising by USD 30.2 million, underscoring primarily a price effect, as the spread in LBP moved from 2.37% in 2012 to 2.89% in 2013. The expansion of the spread is mainly attributed to a decrease in the cost of deposits by a further 49 basis points, amid increased lending in LBP focusing on government-subsidised LBP-denominated loans (mainly housing loans).

In parallel, interest income of Lebanese entities denominated in foreign currencies decreased by USD 17.4 million, underlying a decrease in spread in FCY from 1.59% in 2012 to 1.41% in 2013, driven predominantly by an increase in funding cost broken down over deposits and the recent USD 350 million subordinated issuance.

Meanwhile, in Turkey, interest income of Odeabank increased by USD 66.3 million, broken down over USD 39.3 million in Turkish Lira and USD 27 million in foreign currencies. The improvement in interest income is obviously boosted by the quantity effect as a result of the launch of operations and the ensuing normalisation of operating spreads. In 2013, Odeabank’s spread stood at 1.57% on average, increasing steadily across the year reaching 2.0% in the month of December 2013 and 2.2% in the month of March 2014, a level still below the Turkish market average, with the gap justified by structural effects owed to a loan to deposits ratio of 91.8% at Odeabank as compared to 120% in the sector. On the backdrop of the persisting challenging environment in Turkey resulting in a contractionary effect on spreads in the Turkish banking sector at large, Management’s guidance in 2014 is to sustain and improve spread steadily, though at a lower pace than expected as Odeabank reaches its cruise speed.

In Egypt, interest income of Bank Audi contracted by USD 2.8 million attributed to a negative quantity effect by USD 4.8 million, totally offsetting a price effect of USD 2 million, following a spread expansion from 3.4% in 2012 to 3.46% in 2013. The positive changeover in the political environment and the release of the gulf aid prompted the Central Bank to effect 3 successive decreases in local currency reference rates exerting pressures in the second half of the year. Subsequently, spread in Egyptian pounds dipped by 11 basis points from 4.11% in 2012 to 4.0% in 2013. This was totally offset by the 48 basis points rise of spread in foreign currencies, from 1.21% in 2012 to 1.68% in 2013. In 2014, Management expects an overall contraction in spreads as a result of the run rate effect of the decrease in the reference rates that it expects to be remedied by a quantity effect, underlining the capacity of Bank Audi Egypt to leverage its balance sheet expansion to generate the expected increase in interest income.

Evolution of Non-interest Income

The decrease in non-interest income by USD 104.8 million (20.8%) represents decreases on the one hand by USD 54.3 million in net gains from financial instruments (of which USD 75.1 million in Bank Audi Lebanon) amid thin sluggish capital markets activity, and on the other hand by USD 46.9 million in net gains from foreign exchange following non-recurrent revenues in 2012. In fact, in 2013, non-recurrent FX gains reached USD 31.9million (broken down over USD 25.1 million of capital revaluation in Bank Audi Syria, USD 3.4 million in Bank Audi Egypt and USD 3.4 million in Odeabank) as compared to USD 57.2 million in the corresponding period of 2012 stemming from Syria (USD 17.5 million), Sudan (USD 27.6 million) and Odeabank (USD 12.1 million).

In parallel, non-interest income from operations increased slightly, principally driven by an increase in non-interest income from Retail and Individual Banking activities by USD 9 million, within a mere decrease by USD 1.4 million in fees and commissions from Private Banking activities, totally offsetting the decrease of commissions from syndication and Trade Finance activities amid persisting sluggish environment. Within such context, the resilience of non-interest income from operations underlines the solid fundamental of the diversified business model across geographies in which Management relentlessly seeks to improve its efficiency and agility. Management’s strategy remains to capitalise on the continuing growth in regional trade and capital flows in the Levant, as well as wealth creation in MENA region at a large, leveraging on the Group’s presence in all major regional trade markets and allowing to offer a differentiated service to customers with regional growth ambitions.

The table below presents a segmental breakdown of non-interest income by markets and by business lines:


In relative terms, total non-interest income represented in 2013 37.2% of total income (as compared to 45.7% in 2012) and 1.18% of average assets (as compared to 1.80% in 2012).

Evolution of General Operating Expenses

General operating expenses increased by USD 83.8 million (16.2%), mainly attributed to Odeabank’s recording of an increase by USD 100.5 million and to European and MENA entities registering increases by respectively USD 3.2 million and USD 0.8 million, while Lebanese entities reported a decrease by USD 20.6 million. The increase in general operating expenses in Odeabank is attributed to the opening of 25 branches in 2013 and the hiring of 703 new employees, in addition to significant investment in credit cards and IT systems to cope with the strong growth of the balance sheet.

The decrease in Lebanon is owed to one-off non-recurrent expenses registered in 2012, underscoring a flat growth in general operating expenses in Lebanon in 2013. In parallel, the increase in general operating expenses in Europe in mainly attributed to the on-going restructuring of the Private Banking business line which is expected to yield future growth in assets under management.

The increase in general operating expenses is also broken down over an increase by USD 53.9 million in staff expenses (of which USD 43.4 million from Odeabank), USD 33.9 million in other operating expenses (within an increase by USD 49.9 million in Odeabank) within a USD 4 million decrease in depreciation and amortisation charges.

The table below presents a segmental breakdown of consolidated general operating expenses by type and region:


With total cost increasing at a faster pace than total income for the coincidental reason mentioned above, the cost to income ratio deteriorated from 46.9% in 2012 to 56% in 2013. Adjusting to Odeabank, the cost to income ratio would have moved from 45.1% to 47.8% over the same period.

Evolution of Loan Loss Provision Charges

Loan loss provision charges moved from USD 121 million in 2012 to USD 90.3 million in 2013, corresponding to a decrease by USD 30.7 million, accounted by decreases of USD 37 million in Lebanon, USD 3 million in Europe and USD 9.3 million in the MENA region, predominantly in Egypt, within a positive contribution of USD 18.5 million from Odeabank whose loan portfolio reached, at end-December 2013, USD 5.3 billion bear witness of the corollary evolution in LLPs relative component in asset quality.

Evolution of Income Tax

The consolidated effective tax rate of Bank Audi decreased in 2013 by 3.4%, moving from 28.4% in 2012 to 25% in 2013, mirroring savings of USD 26.4 million, broken down in Lebanon, USD 5.1 million in MENA entities driven predominantly by Egypt and USD 11 million in Odeabank. The evolution of the effective tax rate highlights increased provisioning, negative results in Turkey (tax credits) and a decrease in the up-front taxes on interest received on the investment portfolio in Egypt.

Net Profits from Discontinued Operations

In the absence of any sort of divesture, Bank Audi did not report in 2013 any significant profits from discontinued operations, while in 2012, USD 22.4 million of net profits from discontinued operations were registered, reflecting USD 42.4 million of net profits arising from the sale of 81% of the Bank’s majority stake in LIA Insurance Company and a net loss of USD 19.9 million from the liquidation of Bank Audi sam (Monaco).

Key Performance Metrics

The evolution of activity and results in 2013 were mirrored in the movement of key performance metrics in 2013 as follows:


The return on average assets reported at end-December 2013 0.91% and 1.23% when excluding Odeabank’s results; the return on average common equity amounted to 12.6% and 14.8% when excluding Odeabank. Those ratios clearly witness the important leverage of Odeabank on consolidated earnings and key performance indicators once the Turkish operation achieves its cruise speed.

Earnings per Share

Basic earnings per share are calculated based on the weighted number of common shares actually issued and net profits after tax including profits from discontinued operations. On this basis, Bank Audi’s basic common earnings per share reached USD 0.8 in 2013, as compared to USD 1.01 in 2012, corresponding to a decrease by 20.8% which narrows to 16 % when excluding net profits from discontinued operations.

With the maturity of the Employee Stock Option plan in place since 2006, diluted common earning per share is now equivalent to the basis common earnings per share and reaching in 2013 USD 0.8.

The table below represents the evolution of Bank Audi’s common earnings per share including net profits from discontinued operations over the past 5 years:

1 Reflecting the initial stages of the launch of the fully owned subsidiary in Turkey.

4.4. Analysis by Business Segments

Bank Audi is managed on the basis of a cross-sectional organisation matrix of business lines and markets, reflecting the following four major business segments: Corporate and Commercial Banking, Retail and Individual Banking, Private Banking and Treasury and Capital Markets activities. Those business segments are determined based on the products and services provided, or the type of customers served, and constitute the basis for Management’s evaluation of financial results. Results of each business segment are intended to reflect the performance of each business line, namely in terms of total assets and total revenues. Senior Management sets the business segment reporting methodology which is approved by the Group Executive Committee. During the course of 2013, the FTP model was reassessed, translating into changes in the segmentation, particularly at the level of Retail and Individual Banking and Treasury and Capital Markets. A detailed description of the business segment reporting methodology is provided in Note 4 of the Consolidated Financial Statements.

In parallel, the Group Risk and Group Finance divisions are in the process of completing the implementation of an Integrated Finance and Risk Management System (IFRM) aiming at unifying the source of information and data serving the business, risk and finance to produce analytical tools with a greater granularity, assisting the decision-making process. The IFRM testing process is expected to be launched in April and requires a parallel run phase before going live in 2014.

Notwithstanding, the performance of the four principal business segments of Bank Audi in 2013 is discussed and analysed in what follows:

Corporate and Commercial Banking

Bank Audi provides integrated Corporate and Commercial Banking solutions, with a coverage span entailing the Middle East, GCC, Africa and Europe through its established headquarters in Lebanon and its entities operating in Turkey, Egypt, Syria, Jordan, Saudi Arabia, Qatar, Sudan, France and Switzerland.

In 2003, Bank Audi still managed to achieve a double-digit growth in its consolidated corporate and commercial loan portfolio of 76.4%, with the portfolio reaching a size of USD 11.2 billion at end-December 2013, almost equivalent to the consolidated portfolio of the Group’s immediate peer in Lebanon, further reinforcing the Bank’s position as the largest commercial and corporate lender in the Lebanese sector. The steep growth in the portfolio stems predominantly from the solid expansion of the corporate and commercial portfolio in Turkey carrying an investment grade rating and amounting 14 months after the official launch of Odeabank to USD 4.9 billion, representing 43.2% of the consolidated corporate and commercial loan book. With more than 40% of the increase in the portfolio built in investment grade countries, the achievement of Bank Audi in 2013 bears a dual significance; it mirrors on the one hand the strong fundamental of the franchise and the positive market response of the brand image and the products and services, and on the other hand an enhanced credit risk rating of the overall portfolio.

At an initial stage, Bank Audi’s policy in Turkey focused around targeting top tier Turkish clients by developing a sustainable and long lasting franchise serving not only customers’ borrowing needs, but also their Trade Finance, advisory, cash management and Treasury needs, all of which are opportunities to grow the Bank’s profits and deposit base. Going forward, the Bank aims at expanding its services to the small corporates and SMEs segment offering higher returns. Over and above, the Bank’s value proposition in Turkey continues to revolve around differentiating our services while enhancing the Turkish-Arab commercial activities, fostering greater cooperation, financially and operationally, between customers across frontiers.

In parallel, the Group Corporate and Commercial Banking team at Bank Audi is committed to build scale in markets which have displayed strong resilience in the face of regional challenging conditions and which would potentially offer enticing lending opportunities in defensive sectors, particularly in Lebanon and Egypt. In Syria, the Bank’s strategy will continue to hinge around significantly reducing the exposure to the country, while preserving the network, whereas in France, Jordan and Qatar, the corporate portfolio is set for a moderate growth. The strategic orientation of the Group Corporate and Commercial team focuses on leveraging its regional network to capture the increasing regional trade and capital flows, laying the foundations to become the principal corporate and commercial partner bank in the Levant of pan regional clients.

In 2013, Bank Audi was also able to sustain its presence in the fields of Project and Structured Finance by extending new loans, mainly in Turkey, covering a variety of sectors including aviation and shipping, energy, telecom, retail and commercial development, construction and real estate, tourism, manufacturing industries and insurance.

Likewise, Bank Audi continues to contribute to the development of the economies in the countries of presence of the Group via a continuous support to SMEs, as well as the development of specialised lending programs targeting Micro SMEs and startups.

In parallel, Bank Audi continues to control and monitor the environmental and social impact of its credit-granting process by refraining from financing a number of activities including and not restricted to the production or trade in any product or activity deemed illegal or subject to international bans, in addition to refraining from financing any activities causing pollution or potential environmental damage.

Subsequently, total assets of the Corporate and Commercial segment reached USD 11.9 billion at end-December 2013 as compared to USD 8.1 billion at end-December 2012. LCs openings during 2013 moved from USD 1,795 million in 2012 to USD 1,873 million in 2013 increasing by 4.3%, principally boosted by the increased Trade Finance activity of Turkish operations. Based on the above, the Corporate and Commercial business generated total revenues of USD 320 million in 2013 as compared to USD 272 million in 2012, corresponding to a growth by 17.7%.

Retail and Individual Banking

In 2013, consumer comfort and satisfaction were the main focus of the Retail Banking business line with the cornerstone of the retail strategy revolving around increasing the lending activity while implementing a conservative risk approach, expanding delivery channels, introducing innovative technologies and customisation of existing products and services to improve client retention. With more than 175 branches and 375 advanced ATMs catering to more than 600 thousands clients, supported by an entrenched pool of talent, a comprehensive product offering, up-to-date technologies, regular monitoring of customer satisfaction surveys and initiatives, Bank Audi figures today as a bank of choice for Retail and Individual activities.

Performance wise, 2013 was a good year for the Retail Banking business line which registered an increase in its consolidated loans by 44.2%, exceeding for the first time the USD 2 billion threshold, an evolution principally attributed to Odeabank whose retail portfolio reached, at end-December 2013, USD 347 million in less than 6 months of activity. The increase in the retail loan portfolio was well balanced across product types with housing loan accounting for a 46% share, 30% for personal loans, 11% for car loans and 12% for credit cards. This is also mirrored across pillar markets with Lebanon achieving a growth of 28.2% followed by 12.1% in Egypt, while Jordan posted 14%. The retail loan portfolio in Syria contracted by a further 61%, reaching, at end-December 2013, USD 24.5 million, 87% of which is covered by provisions. The expansion of the portfolio was not achieved at the detriment of its quality. In the opposite, the gross doubtful to gross loan ratio improved from 2.9% at end-December 2012 to 2.2% at end-December 2013, a level below the Bank’s risk appetite and risk limit. Based on the above, the Retail business generated total revenues of USD 109 million in 2013 as compared to USD 100 million in 2012, corresponding to a growth by 9%.

Moving forward, the Group is launching different projects, streamlining scoring models to loan origination, processes and organisation in the aim to improve quality and efficiency. In Lebanon and Turkey, several technological initiatives are underway to design alternative channels offering an enhanced experience to customers, ease of use and multiple banking options through Online and Mobile Banking (e-Banking) and Self-Service and ATMs, laying the foundation for the next generation of self-service Interactive Teller Machines and Remote Direct Banking with an enlarged Novo network delivering new services via video collaborative remote banking technology. Design and roll out for other entities will follow within a planned roadmap.

This comes on the backdrop of several customer-centric initiatives throughout the year 2013 across the main retail entities, aiming at reinforcing retention while growing the customer base and encompassing the launch of innovative technology and supported by a transparent communication. Part and parcel of these initiatives in Lebanon was the launch of various products tailored to move the Bank closer to its customer satisfying specific needs such as the Spring Account, the Sight Deposit Account, the Doctors’ Loan, in addition the 25 Year-tenure Event for loyal customers and the Labour and Children Days activities.

In Jordan, the retail strategy aimed at a greater diversification of the Bank’s products and services offering and channel reach, allowing to enhance its customer mix and improve the overall profitability. Executed initiatives included the launch of a deposits incentive program for employees, a Formula One associated car loan campaign, migrating Visa and MasterCard cards to the chip technology, in addition to a number of other similar initiatives launched in compliance with the new regulatory requirements for transparency and fairness.

In Egypt, retail strategy in 2013 focused primarily on improving front liners’ competencies while undertaking several successful initiatives such as the introduction of new services on ATMs and of targeted seasonable advertising campaign, refurbishing the Auto Loan activity and signing an agreement with MasterCard while migrating all credit cards to the chip technology, improving the security level and abiding by international standards.

In Turkey, Bank Audi focused its efforts during its first year after launch on expanding its customer base by offering superior services and an extensive product line-up. To serve these purposes, a basket of products, services and channels were introduced in 2013, ranging from Wealth Management services, Bancassurance, consumer loans at competitive pricing, an innovative multi-fund platform, signing an alliance with Axess credit cards, all supported by an assertive marketing communications and a diversified state-of-the-art channel solution. Subsequently, Odeabank successfully gathered noticeable momentum in customer acquisition despite being a new player in the market.

Private Banking and Wealth Management

The Private Banking arm of Bank Audi is the trusted partner that responds to the needs of high net worth individuals through its network in Europe (Geneva, Monaco) and in the Middle East (Beirut, Riyadh, Abu Dhabi, Amman, Doha). With its global organisation and over 37 years of experience in Switzerland, the Private Banking business line is one of the strategic key growth drivers of the Group, next to its three key geographies (Lebanon, Turkey, Egypt).

In 2013, the Private Banking business line accelerated the restructuring plan underway aiming at a steady convergence of the Private Banking entities towards a unified group, leveraging on existing synergies and pooling resources to lay the foundation for a sustained development of the Private Banking business line over the medium term. This was met with a successful expansion of its footprint covering Turkey, Africa, Latin America and the Middle East, while improving its customer service by providing late hours trading capability until New York close of business, and by offering MENA portfolio management capabilities, in addition to the existing global market expertise.

Following the successful implementation of a revised business model, whereby customers, through a unique Relationship Manager, are able to bank in the entity which best suits their needs, the total revenues of the Private Banking activity in 2013 posted a growth of 26.4 % compared to 2012, while maintaining tight costs control. Consolidated assets under management grew by 10%, reaching USD 9.3 billion at end-December 2013, a level which compares competitively with portfolios managed by leading banks in the GCC.

Treasury and Capital Markets

Bank Audi’s financial services include Capital Markets, Investment Banking, asset management and securities services. The Bank is leveraging its regional presence to develop further its securities services and brokerage platform, consolidating the business towards increased intra-group synergies.

In Lebanon, Bank Audi stays the leading international market maker in Lebanese securities, namely in Republic of Lebanon Eurobonds and Lebanese Treasury notes, with an annual turnover of USD 7.3 billion in 2013. As for equities, they accounted in 2013 for a 38.8% market share on the Beirut Stock Exchange, while also being active in Saudi Arabia and Egypt equity markets, as well as fixed income markets. Those activities, in Lebanon and the MENA region, are supported by an extensive sovereign, fixed income, and corporate research coverage business.

Bank Audi continued to develop and maintain new and existing institutional coverage of Lebanese securities to international non-bank financial Institutions. This marketing effort for Lebanese paper comes in a current global environment where fund managers are searching for high yield rather than high rating investment solutions, which makes the Lebanese high Beta bonds particularly attractive.

In parallel, the Bank’s asset management, corporate finance and advisory businesses are currently focused on the Saudi Arabian market and are also supported by extensive equity research coverage.

In line with the consolidated position, assets of the Treasury and Capital Market activities sustained their level as at end-December 2012, reaching USD 16.5 billion at end-December 2013. Nonetheless, and driven by the sluggish capital market at large, total revenues of this business segment reported a contraction of 12.2%, moving from USD 642 million in 2012 to USD 564 million in 2013.

4.5. Capital Management

Capital management at Bank Audi focuses on sustaining a long-term capital position sufficient to cover all material risks underlying from its various business activity and report a “well capitalised” status, while considering the requirements of regulators, rating agencies, depositors and shareholders, and the Group’s internal capital ratio targets set in our business plans. Management’s goal is to optimise the capital usage while providing support for the expansion of business segments and entities, benefiting from arising inorganic growth opportunities and protecting depositors and shareholders’ interests. Changes in shareholders’ equity, net earnings of the year and dividends policies are inter-linked with the preservation of capital strength.

Evolution of Shareholders’ Equity

Consolidated shareholders’ equity increased in 2013 by USD 27 million, representing the issuance of USD 100 million of additional preferred shares in May 2013, USD 141 million of internal capital generation and USD 21 million of other equity changes totally offset by the increase in the Treasury stock position by USD 62 million and the increase in the change in foreign currency translation reserves by USD 173 million. Notwithstanding, the consolidated shareholders’ equity of Bank Audi reached, at end-December, USD 2.7 billion, broken down over USD 2.1 billion of common Tier one equity, USD 500 million of additional Tier one equity and USD 93 million of Tier two equity. Adding to equity, the USD 350 million of subordinated debt issued in September 2013 and accounted by Basel III as Tier two capital, the Bank’s gross regulatory capital would reach more than USD 3 billion.

In the first quarter of 2014, the Group registered the following subsequent events that reinforced the capital base:
  • The closing on March 27, 2014 of the issuance of USD 150 million of subordinated loans with the IFC, a member of the World Bank Group, and the IFC Capitalisation Fund, managed by the IFC Asset Management Company;
  • The sale of the entire Treasury stock position of the Bank to private Lebanese and regional investors, boosting equity by USD 70 million, equivalent to the consolidated Treasury stock position at end-December 2013.

Regulatory Requirements – Central Bank of Lebanon Intermediary Circular No. 358

In October 2011, the Central Bank of Lebanon amended Basic Circular No. 44 requiring banks to report capital ratio following the Basel III framework, setting higher capital requirements to be achieved gradually in phase-in arrangements as described in the following table:

1 Must be met with common equity Tier 1 (CETI).

On March 6, 2014, the Central Bank of Lebanon issued Intermediary Circular No. 358 whereby the major change involved charging a 50% risk weight on all deposits and reserve requirements at the Central Bank of Lebanon instead of 100% previously, while allowing banks to add to equity up to 50% of unrecorded real estate revaluation income, provided an amount of fresh funds equivalent to the recorded revaluation income is injected to equity on or before the end of 2018 with the prior approval of the Central Bank of Lebanon.

The said circular also gave some clarification on the conservation buffer (representing 2.5% in 2015 and must be met from core common Tier one), whereby the latter becomes separate from the minimum CAR regulatory requirement (set at 5%, 7.5% and 9.5%) and represents 2% in 2014 and 2.5% in 2015. Should the Bank not secure the required conservation buffer at any point of time, it should seek the Central Bank’s approval to cover the shortage within a grace period in accordance with a clear plan to cover the shortage.

Based on the new circular effective as at end-December 2013 and including profits, the Bank’s capital adequacy ratio would stand at 12.1% at end-December 2013, as compared to 9.5% regulatory requirement (10.5% including the conservation buffer). The capital adequacy ratio is broken down over 7.8% of core common Tier one ratio, 2.3% of additional Tier one ratio and 1.9% of Tier two ratio. The evolution relative to end-December 2012 (13.7%) is justified by the important increase in risk-weighted assets, reaching USD 5.1 billion in 2013, which translated in changes in the components of the capital adequacy ratio.


Regulatory Requirements – ICAAP

As a part of the implementation of Pillar 2 of the Basel II framework, the Central Bank of Lebanon, in its Basic Circular No. 119 dated July 21, 2008, followed by the Banking Control Commission of Lebanon (BCCL) Memorandum 9/2010 dated October 20, 2010, required Lebanese banks to report the Internal Capital Adequacy Assessment Process (ICAAP) at the start of an assessment parallel run period set on June 30, 2011. In 2011, Bank Audi, aligning with best practice, submitted its consolidated ICAAP report to the Central Bank of Lebanon, after it was challenged by the Group Executive Committee and the Board Group Risk Committee and approved by the Board of Directors.

Early 2014, the Bank proceeded to the preparation of the third Internal Capital Adequacy Assessment Process (ICAAP) report prior to its submission to Senior Management and the Board of Directors. The Bank continues to view the ICAAP as an important internal initiative rather than just a regulatory one by calculating both regulatory and economic capital. This is being reflected by the ICAAP becoming an integral part of the Bank’s decision-making process and an essential tool used by Management and the Board for capital planning. It also acts as an important exercise that drives the Bank to develop and use better risk measurement techniques. Building on the approaches used in the ICAAP 2011 submission, the Bank since then further developed and refined various risk methodologies and included more sensitive risk measures able to capture risk more adequately. The assessment was based on quantitative and qualitative methods. In preparation for moving towards more advanced methods in the Basel framework, the Bank adopted the Foundation-IRB approach within the internal credit risk capital charges calculations for certain asset classes in order to better capture the quality and riskiness of the portfolios.

The ICAAP was conducted for the Group on a consolidated basis and on an individual basis for some material entities to ensure that standalone capital is appropriate. Various stress tests were conducted using multiple scenarios and severities. The preliminary results of the ICAAP in 2014 show that the Bank is able to sustain the low-to-medium stress scenarios without its capital adequacy ratio dipping into the capital conservation buffer.

Common Book per Share

In addition to the regulatory ratios mentioned earlier, Management, investors and analysts use the common book per share as a measure to assess capital adequacy. Common equity represents total equity less minority shares less preferred shares. Common equity per share is based on the outstanding number of common shares net of Treasury stocks at the end of the period.

The table below presents the evolution of common equity per share between end-December 2012 and end-December 2013:


Common equity per share of Bank Audi stabilised in 2013 at USD 6.25. On the basis of a price of USD 6.24 at end-December 2013, the common share is traded at 1 time the common book value, versus an average of 2 times for regional and emerging markets.