Download PDF
Download PDF
Download PDF

Management Discussion And Analysis

4.0. 2014 Activity and Performance Analysis

4.1. Business Overview in 2014

Bank Audi’s performance in 2014 once again confirms the soundness of the Group’s diversification strategy, driving growth in spite of the persisting challenging operating environment, particularly in Arab Countries in Transition (ACTs), with consolidated net profits rising by 15% relative to 2013 to reach USD 350 million, after the allocation of USD 140 million of net loan loss provision charges, reinforcing the Bank’s asset quality at large. In parallel, consolidated assets grew by 15.9% to exceed, for the first time, the USD 40 billion threshold.

The growth in the Bank’s balance sheet reflects the resilience, as well as the strong dynamics, across key businesses in spite of the challenging environment, highlighting the Bank’s capacity to attract new customers and to expand its range of services. Both the number of customers and the total number of accounts continued to increase, with 148,422 new customers and 356,931 new accounts in 2014. At end-December 2014, the Bank’s franchise counted 834,247 customers and 1,602,451 accounts. Accordingly, the Bank retained its status as the leading bank in Lebanon by assets, deposits, loans and shareholders’ equity, while reinforcing its positioning among the top 20 largest Arab banking institutions according to the same criteria.

4.2. Consolidated Balance Sheet Management

Consolidated assets of Bank Audi increased by USD 5.8 billion in 2014, from USD 36.2 billion at end-December 2013 to USD 42 billion at end-December 2014, reaching USD 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. Assets growth in Egypt and Turkey comes on the backdrop of improving economic conditions as

Consolidated Balance Sheet Management

witnessed by a real GDP growth rate of 3% in Turkey (14% in nominal terms) and 2.2% in Egypt (17% in nominal terms) within the context of a subdued growth of 1.8% in Lebanon (6% in nominal terms). Accordingly, Bank Audi Egypt and Odea Bank accounted for a higher share in the sector’s increase than their asset market share, allowing them to improve their market share and positioning among the private deposit banks.

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% 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% of consolidated assets are booked in investment grade countries, reinforcing the overall quality of the Bank’s assets.

Consolidated Balance Sheet Management The following discussion covers an analysis of the evolution of funding sources and their uses in 2014 at a consolidated level.

Funding Sources

Consolidated Customers’ Deposits

Consolidated customers’ deposits continued to drive consolidated assets growth in 2014, increasing by USD 4.7 billion, equivalent to a growth of 15.2%, witnessing to a good performance relative to a number of large regional banks. This growth was principally driven by deposit increases in entities in Turkey, Egypt and Lebanon. Accordingly, consolidated customers’ deposits moved from USD 31.1 billion as at end‑December 2013 to USD 35.8 billion end-December 2014, exceeding the deposit bases of a number of leading regional banks.

By business segment, the increase in deposits was skewed towards retail and individual deposits, representing at end‑December 2014 69.4% of consolidated deposits (as compared to 70.8% at end-December 2013) with corporate and commercial deposits representing at end-December 2014 30.6% of the total (as compared to 29.2% as at end-December 2013).

By type of deposits, time and saving deposits made up for almost all the consolidated deposits increase, underscoring reinforced stability of deposits. The increase in time deposits was totally offset by decreases in related parties’ deposits. At end-December 2014, time deposits represented 66.5% of total deposits followed by 14.4% for saving deposits, 14.4% for sight deposits, 1.1% for related parties’ deposits, and 3.7% for

Funding Sources

other deposits. This is to be compared to 69.9%, 10%, 14.8%, 1.6% and 3.7% respectively at end-December 2013.

Consolidated customers’ deposits continued to represent 85% of total funding as at end-December 2014, as compared to 86% as at end-December 2013. Subsequently, supplementary funding sources were represented by shareholders’ equity (accounting for 8% of total funding), dues to banks (representing 4% of total funding), subordinated debt (1%) and other liabilities (2%).

Funding Sources

Shareholders’ Equity

Consolidated shareholders’ equity rose from USD 2,696 million at end-December 2013 to USD 3,348 million at end-December 2014, representing an increase by USD 652 million in 2014. This increase was mainly the result of the completion, in spite of the tough regional environment, of the USD 300 million capital increase at end-September 2014, primarily through rights offering of common shares to existing shareholders in the amount of USD 240 million, as well as the subscription by the International Finance Corporation, a member of the World Bank Group, to new common shares in the amount of USD 60 million. The subscription price per common share was USD 6.00, and eligible subscribers were allocated three warrants per common share subscribed entitling to purchase one common share of the Bank’s Turkish subsidiary, Odea Bank, for each warrant. Fifty million Bank Audi’s common shares were issued in the capital increase, as well as 149,528,847 warrants, representing approximately 10.0% of Odea Bank’s common shares. There was an initial take up of 87.1% of the rights issue by existing shareholders (including a take-up of 94% by holders of the Bank’s Global Depositary Receipts (GDRs), with the balance taken up in full through residual subscriptions by existing shareholders). This transaction showed the confidence of existing and new shareholders in the Group’s performance and direction. The partnership with IFC will further assist the Bank in expanding access to underserved segments, such as small and medium enterprises and support planned expansion to new jurisdictions, in particular where IFC has significant in‑country knowledge and experience.

The increase in shareholders’ equity is also justified by USD 221 million of additional reserves for revaluation of fixed assets booked in accordance with BDL Intermediary Circular No. 44, within the context of USD 30.2 million of proceeds from the liquidation/sale of AZA Holding based on the terms of the shareholders’ agreement, USD 72.6 million of reduction in the Treasury stock position, and USD 160.1 million of internal capital generation, totally offsetting the USD 101.1 million of additional negative changes in foreign currency translation reserves. The latter is broken down over an impact of depreciation of mainly the Turkish Lira by USD 50.3 million, the Egyptian Pound by USD 13.6 million, the Euro by USD 0.8 million and the Syrian Pound by USD 7.3 million between end‑December 2013 and 2014. In January 2014, the Bank opted for hedging a large part of the capital invested in Odea Bank, which has been converted into Turkish Lira to protect itself against depreciation of the currency against the US Dollar. The hedging strategies that were entered into are a combination of capped calls and rolling collars, which would provide adequate levels of protection while minimising the impact of their cost on the net income of the Bank. As a result, the Bank bears an annual cost of hedge of USD 18 million.

When adjusting to the subordinated loans, gross regulatory equity reached USD 3.3 billion at end-December 2014, translating into a capital adequacy ratio of 13% as per Basel III, as compared to an 11.5% regulatory minimum requirement. Please refer to Section 4.5. for a detailed analysis of the capitalisation ratios in 2014.

Subordinated Debt

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, which are expected to be repaid on April 11, 2024, 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 loans bear an interest rate spread of 6.55% over 6-month LIBOR and applicable fees per annum payable on a bi-annual 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.

This issuance comes over and above the issuance by the Bank in September 2013 of USD 350 million of subordinated unsecured bonds which are expected to be repaid on October 16, 2023, unless previously accelerated or redeemed by the Bank. Those bonds carry an annual interest rate of 6.75% payable on a quarterly basis subject to the same conditions as mentioned above.

Both issuances are accounted for as regulatory Tier 2 capital. Please refer to Note 39 in the Consolidated Financial Statements for further details.

Asset Utilisation (Balance Sheet Allocation)

The assets utilisation policy of the Group continues to favour placements in asset classes that have the highest impact on profitability, while taking into consideration an optimum diversification of risks and a conservative approach to asset quality. Balance sheet allocation is as such 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’s Credit Risk department.

Bank Audi’s results as at end-December 2014 assert the Group’s high financial flexibility with primary liquidity accounting for 45.1% of total deposits and the loans to deposits ratio standing at 47.9% at the same date, reflecting the Group’s sufficient capacity to extend loans while continuing to optimise the liquidity and yield management.

Asset Utilisation (Balance Sheet Allocation)

In what follows, we analyse the evolution of the various asset classes and their respective key indicators at end-December 2014 relative to end-December 2013.

Consolidated Loan Portfolio

The majority of the Group’s lending consists of working capital finance and trade finance to corporates, as well as to small and medium-sized businesses, with a growing share of retail lending booked in Lebanon as well as in subsidiaries abroad. Working capital financing is provided by way of credit lines, overdraft facilities and short-term loans (with terms of less than one year).

Over the past year, consolidated net loans rose from USD 14.7 billion at end-December 2013 to USD 17.2 billion at end‑December 2014, equivalent to an increase by USD 2,458 million accounted principally by Odea Bank, amid an increase in loans by USD 213 million in Egypt totally offset by a contraction in loans in Lebanese entities. In terms of geographic risk as at end‑December 2014, loans to the Lebanese private sector represented 29.3% of the total loan portfolio (as compared to 33.2% as at end‑December 2013), loans to the Turkish private sector represented 45.2% (rising from 36.6% as at end-December 2013), loans to the Egyptian private sector 10.8% (11.4% as at end-December 2013), loans in Europe 6.6%, and loans in other MENA entities accounted for 8.0% of the total. Amid a challenging operating environment across the MENA limiting the availability of enticing lending opportunities, net loans booked in Lebanon for regional corporates dropped by USD 385 million in 2014, reaching USD 824 million at end-December 2014.

Asset Utilisation (Balance Sheet Allocation)

On the back of an almost equivalent growth pace for consolidated loans and consolidated deposits, the consolidated loans to deposits ratio improved marginally from 47.3% as at end-December 2013 to 47.9% as at end-December 2014, amid a 30% ratio in Lebanese entities, 46.3% in Egypt and 85.1% in Odea Bank.

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

Loans Breakdown by Customer Type
In 2014, the corporate clients are the major contributors to the consolidated loan portfolio, accounting for 62.4% of the total (61.9% in 2013), followed by consumer loans with 16.7% (14.1% in 2013), loans to SMEs with 11.5% (14.6% in 2013), and finally loans to individuals and Private Banking with 9.4% (9.5% in 2013).

This remains in line with the Group’s strategy to strengthen its presence within the corporate business line spearheaded by the Turkish market. Going forward, growth of both profitable SMEs and retail segments will be our priorities in all three main markets of the Group, namely Turkey, Egypt and Lebanon.

Asset Utilisation (Balance Sheet Allocation)

Loans Breakdown by Economic Sector
The concentration of the loan portfolio by economic sector remains within the BOD’s approved concentration limits relative to each of the loan portfolio and consolidated equity. At end‑December 2014, the largest concentration by sector consisted in manufacturing industries (17.2%), consumer loans (16.7%), real estate services and developers (16.2%), wholesale trade (12.9%), and financial intermediaries (10.5%), with no major changes to report except for the share of contractors in the total, driven by the contribution of Odea Bank in Turkey, although this increase remains within the risk appetite of the Group.

Asset Utilisation (Balance Sheet Allocation)

Loans Breakdown by Maturity
The maturity profile of the consolidated loan portfolio continues to evolve to the advantage of medium-term facilities. Indeed short-term facilities, with maturities of less than one year reflecting mainly working capital financings and goods financings to customers, represented 38.4% of the consolidated loan portfolio at end-December 2014, a stable level relative to end-December 2013 (37.3% in 2013). In parallel, medium-term tenors moved from 18.5% at end-December 2013 to 20.7% at end-December 2014, reflecting the maturity structure of Odea Bank’s loan portfolio in Turkey. The share of long-term tenors moved from 44.2% as at end-December 2013 to 40.9% as at end-December 2014.

Asset Utilisation (Balance Sheet Allocation)

Loans Breakdown by Currency
The charts below highlight the breakdown of the loan portfolio by currency. Although the USD remains the dominant currency at end-December 2014 with 46%, its share has decreased by 5.3% from 51.3% at end-December 2013, reflecting the solid growth in the portfolio of the Turkish subsidiary which has 48.5% of its loans denominated in Turkish Lira and the remaining in foreign currencies (mostly in USD). Accordingly, the share of Turkish Lira denominated loans in the consolidated loans rose from 15.9% as at end-December 2013 to 22.3% as at end-December 2014, with the share of Lebanese Pounds, Euro and Egyptian Pounds stabilising over the same period.

Asset Utilisation (Balance Sheet Allocation)

Loans 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 also relies on the availability and enforceability of collaterals. As at end-December 2014, Bank Audi’s loan portfolio remains adequately collateralised, as secured loans represented more than 42% of the total loan portfolio of which real estate mortgages (26.5%) and cash/bank guarantees (12.9%). Loans covered by personal guarantees represented 23.8% of the portfolio as compared to 19.4% at end-December 2013.

Asset Utilisation (Balance Sheet Allocation)

Evolution of Contra-accounts

The Group’s Trade Finance activities renewed in 2014 with growth generally driven by Odea Bank, Egypt and Lebanon by order of importance. In fact, consolidated LC openings grew from USD 1,873 million in 2013 to reach USD 2,395 million in 2014, corresponding to an increase by USD 522 million or a growth of 27.9%. LCs openings of Odea Bank and Bank Audi Egypt doubled in 2014, coupled with an 8.2% growth registered in Lebanon in line with the domestic economic growth trend. Concurrently, outstanding letters of credit increased by 23.7% in 2014 to reach USD 468 million at end-December 2014 from USD 379 million at end-December 2013, while outstanding letters of guarantee increased by 2.4% to stand at USD 1,783 million at end-December 2014.

Loan Quality

Asset Utilisation (Balance Sheet Allocation)

1 Including interest in suspense on doubtful loans.

The growth of the consolidated loan portfolio of Bank Audi was not achieved at the detriment of asset quality. Within the context of a persisting challenging environment domestically and regionally, the ratio of gross doubtful loans to gross loans moved from 2.8% as at end-December 2013 to 3.1% at end-December 2014, while the coverage of those loans by specific loan loss reserves rose from 64.3% to 71.6% over the same period. When accounting for real guarantee, the coverage ratio would reach 87% as compared to 78.9% in 2013. Notwithstanding coverage ratios, the ratio of gross doubtful loans to gross loans of Bank Audi remains low when compared to the sector averages in Lebanon (3.6%), the MENA region (4.7%), emerging markets (6.5%) and the world (6.7%).

In absolute terms, gross doubtful loans increased by USD 117.4 million during the year, broken down over USD 32.6 million in Lebanese entities, USD 92.5 million in Odea Bank and USD 6.3 million in Bank Audi Egypt, amid a contraction by USD 19.3 million in Bank Audi Syria. The increase in doubtful loans in Lebanese entities was triggered by Management’s decision to downgrade USD 19.9 million of corporate loans unrelated to any Lebanese risk but booked in Lebanon for non-residents. The remaining USD 12.7 million of downgrades cover retail loans following the implementation of Circular No. 383 issued by the Central Bank of Lebanon and amending loan classification and minimum provision requirements by product and by bucket so as to align all banks on the same level. Although justified by the expected seasoning of the portfolio, the downgrades in Odea Bank result from Management’s conservative early decision to downgrade a number of watch loans in the month of December 2014 amid an increase in doubtful retail loans by USD 38.4 million. Having said that, the ratio of gross doubtful loans in Turkey and Egypt is still well below the market averages, and reached 1.5% for Odea Bank as compared to a market average of 2.9%. The ratio of gross doubtful loans to gross loans of Bank Audi Egypt stood at 2.6% as compared to a market average of 8.9%.

The increase in gross doubtful loans was met with an allocation of loan loss provisions by USD 152.4 million in 2014 broken down over specific provisions of USD 118.3 million and collective provisions of USD 32.3 million, while the remaining USD 1.8 million were accounted for by write-off effected during the year.

Specific provisions reached USD 386.7 million, broken down over USD 215 million in Lebanese entities, USD 46.5 million in Odea Bank, USD 31.6 million in Bank Audi Egypt and USD 11.9 million in Private Banking entities and USD 81.9 million in other entities. Including interest in suspense, specific provisions.

The table below highlights the evolution of loan quality indicators in the main development pillars, Lebanon, Egypt, Turkey and Private Banking entities.

Asset Utilisation (Balance Sheet Allocation)

Changes in Primary Liquidity

The Bank continues to consistently maintain a highly-liquid position. The Bank’s overall primary liquidity, comprised principally of balances held at the Central Bank (excluding Central Bank certificates of deposits) and placements with banks, increased from USD 9.2 billion as at end-December 2013 to USD 13.1 billion as at end-December 2014, representing 36.6% of customers’ deposits (as compared to 29.6% as at end-December 2013). When adjusting for BDL certificates of deposits, the ratio of primary liquidity to customers’ deposits rises to 45.1%, one of the highest levels in the region.

From a currency perspective, the Bank’s primary liquid assets in Lebanese Pounds are essentially composed of cash and deposits with the Central Bank. The ratio of Lebanese Pound‑denominated liquid assets to Lebanese Pound‑denominated customers’ deposits increased to 13.5% as at end-December 2014 from 9% as at end-December 2013. The Bank’s primary liquid assets denominated in foreign currency consist of cash and short-term deposits placed at central banks, excluding certificates of deposits, and placements at prime banks (rated A3 and above) in OECD countries. Primary liquidity in foreign currencies increased from USD 8.8 billion as at end-December 2013 to USD 12.5 billion as at end-December 2014, representing 40% of consolidated deposits in foreign currencies as compared to 33.2% as at end-December 2013.

Primary liquidity remains mainly concentrated on Central Bank placements, representing 67% of the total as at end‑December 2014, while bank placements, composed of money market deposits and short term loan participations and reverse repo balances, accounted for the remaining 33%.

The table below highlights the breakdown of primary liquidity by type and by currency as at end-December 2014:

Asset Utilisation (Balance Sheet Allocation)

moved from USD 271.4 million as at end-December 2013 to USD 386.7 million as at end-December 2014. Accordingly, the ratio of net doubtful loans to gross loans improved from 1.0% at end-December 2013 to 0.9% at end-December 2014.

Total collective provisions reached USD 138.9 million at end‑December 2014, the equivalent of 0.81% of the consolidated net loans portfolio, broken down over USD 54.8 million in Lebanese entities, USD 25.8 million in Odea Bank, USD 13.3 million in Bank Audi Egypt and USD 45 million in other entities (mainly Bank Audi Syria and Bank Audi Jordan). Management remains committed to gradually increasing the ratio of collective provisions to net loans across main entities to reach 1% over the medium term.

Total money markets placements with banks reached USD 2.4 billion at end-December 2014, as compared to USD 2.7 billion as at end-December 2013. They 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 40% of these placements are held in banks rated A- or better as displayed in the following charts.

Asset Utilisation (Balance Sheet Allocation)

Exposures to banks are continuously monitored by the Risk Management department in close coordination with the 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 remain well under control.

In parallel, the Bank entered into reverse repurchase agreements for USD 1.9 billion as at end-December 2014 as compared to USD 0.4 billion as at end-December 2013 mainly in Turkey and Lebanon. The Bank holds the highest available quality of local securities as collateral, namely in the form of certificates of deposits from the Central Bank of Lebanon and Turkish Treasury bills.

Changes in Portfolio Securities

The increase in consolidated primary liquidity was partly funded by a decrease in consolidated portfolio securities comprising of BDL certificates of deposits, Lebanese Treasury bills and Eurobonds, other sovereign securities, equity instruments, as well as various other securities. Consolidated portfolio securities decreased in 2014 by USD 1,126 million, moving from USD 11,226 million at end-December 2013 to USD 10,100 million as at end‑December 2014, corresponding to a contraction by 10%. As a percentage of total assets, the Bank’s securities portfolio represented 24.1% as at end-December 2014 as compared to 31.0% as at end-December 2013.

The following table shows the distribution of the Bank’s portfolio securities by type of security as at end-December 2014 relative to end-December 2013:

Asset Utilisation (Balance Sheet Allocation)

Lebanese Bond Portfolio
The decrease in the consolidated portfolio securities was mostly accounted for by Lebanese Eurobonds, contracting by USD 948 million (including risk-ceded government Eurobonds) over the same period, pointing to the optimisation of liquidity placements measures implemented by Management. At end‑December 2014, Bank Audi’s exposure to Lebanese sovereign Eurobonds in foreign currency stood at USD 2,556 million (as compared to USD 3,504 million as at end-December 2013), of which USD 1,446 million of bonds whose risk has been ceded to customers (as compared to USD 1,202 million as at end-December 2013). Subsequently, the net exposure to sovereign Eurobonds reached at the same date USD 1,110 million, representing 11% of the Bank’s total portfolio securities and 3.7% of foreign currency denominated customers’ deposits (as compared to respectively 20.5% and 9.1% as at end‑December 2013).

Non-Lebanese Sovereign Securities
In parallel, the Bank also bears a significant exposure to the non-Lebanese sovereign risk, particularly that of Turkey and Egypt in consideration to the Group’s sizeable operations in those markets. As at end-December 2014, the non-Lebanese sovereign bonds portfolio reached USD 2,662 million, rising from USD 2,121 million as at end-December 2013 and underscoring a year-on-year increase by USD 541 million. The Bank’s exposure to the sovereign risk of Egypt reached USD 1,610 million at end-December 2014 (as compared to USD 1.1 billion as at end-December 2013), while its exposure to the sovereign risk of Turkey amounted to USD 210 million, equivalent to TL 488 million as compared to TL 943 million as at end-December 2013. In relative terms, the portfolio of non-Lebanese sovereign bonds represented 26.4% of the total securities portfolio and 8.5% of foreign currency denominated customers’ deposits (as compared to 18.9% and 8%, respectively, as at end-December 2013).

Other International Fixed Income Securities
Well diversified across sectors, placements in other international fixed income securities contracted by 33.5% in 2014, moving from USD 902 million to USD 600 million. These placements continue to favour highly rated financial institutions which accounted for 65% of the total international bond portfolio at end-December 2014 (as compared to 56% as end-December 2013), while corporate issuers accounted for 28% (32% in the previous year) and sovereigns for 7% of the total (same as at end-December 2013). 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 geographic allocation, 46% of international fixed income bond positions relate to issuers domiciled in GCC markets, 25% in core western Europe countries, 17% in the Far East, 9% in the USA, 2% in Australia, and 1% in Jordan.

The charts below show the breakdown of the other international bond portfolio by geographic location and by ratings.

Asset Utilisation (Balance Sheet Allocation)

This portfolio enjoys a high average rating, as 90% is invested in bond issues rated A- or better. The highest single issuer position in this portfolio represents 7.3% of the total, while the second largest represents 6.7% of the total, underscoring a good level of diversification. At end-December 2014, the top exposure, representing an investment by USD 43 million, was held in an AA- rated issuer.

4.3. Results of Operations

Bank Audi’s results in 2014 confirm the Group’s good mastery over the operating conditions in the various countries of presence, mainly in Turkey where the subsidiary is well positioned to achieve a sustainable growth in net profits, in line with preset targets. Bank Audi’s net earnings after provisions and taxes reached USD 350 million in 2014 as compared to USD 305 million in 2013, which represents a 15% growth year-on-year.

This performance stems from a 23.5% 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. Accordingly, the revenue stream of the Group continues to be well diversified, with the share of Lebanese entities in total revenues further declining from 55.9% in 2013 to reach 48.9% in 2014, with Turkey accounting for 20.2% of total revenues in 2014 (as compared to 9.2% in 2013) and Egypt 12.2% (as compared to 13.6% as at end-December 2013), and with the remaining entities accounting for 18.7% of the total.

The tables below present an overview of Bank Audi’s consolidated financial results in 2014 as compared to 2013:

Results of Operations

The USD 252.2 million increase in total income was met by an increase in total costs by USD 206.4 million over the same period, representing a growth of 26.9% relative to 2013. Total cost includes general operating expenses, loan loss provision charges and tax cost. The diversification profile of general operating expenses matches that of revenues with the share of Lebanese entities declining to 48.8% in 2014, with 25.2% for Turkey, 9.2% for Egypt and 16.8% for other entities, as compared to 49.1%, 22.6%, 10% and 18.4% respectively in 2013.

Evolution of Interest Income

56.3% of the increase in consolidated total income in 2014 was accounted for by consolidated interest income rising over the period by USD 141.9 million (i.e. a growth by 21.1%) to reach USD 815.2 million. The increase in interest income was mainly driven by a quantity effect (USD 122.8 million), with average assets growing year-on-year by 15.4%, coupled with a price effect of USD 53.4 million following the reinforcement of consolidated spread by 10 basis points, largely driven by Odea Bank within the context of negative FX effect of USD 34.3 million following the depreciation of the Egyptian Pound and the Turkish Lira over the period.

By entities, the share of interest income of Lebanese entities (excluding Audi Private Bank sal) in consolidated income continued to decline, moving from 53.9% in 2013 to 43.8% in 2014, to reach USD 357.2 million as compared to USD 362.8 million in 2013. In fact, interest income of Lebanese entities decreased by USD 5.6 million in 2014, mainly attributed to a

Evolution of Interest Income

negative price effect of USD 20.5 million totally offsetting a quantity effect of USD 14.9 million.

By currency, the decrease is driven by interest income denominated in Lebanese Pounds which contracted by USD 30.2 million, underscoring primarily a quantity effect, with average assets contracting over the period by USD 309.6 million, along with a price effect. Spread in LBP moved from 2.71% in 2013 to 2.68% in 2014, driven by a decrease in the yields on placements with the Central Bank of Lebanon.

On the other hand, interest income of Lebanese entities denominated in foreign currencies increased by USD 6.1 million, underlying predominantly a quantity effect amid a 5 basis points decrease in spread in FCY justified by an increase in the cost of deposits in foreign currencies and the additional cost related to the USD 150 million subordinated issuance to the IFC.

In Turkey, interest income of Odea Bank increased by USD 130.2 million, driven almost evenly by quantity and price effects. In 2014, Odea Bank’s spread stood at 2.29% on average, increasing from 1.55% on average in 2013 (74 basis points). This spread evolution in 2014 results from an active management of yields and cost within the context of changing market conditions. On the backdrop of the political crisis and market volatility in late 2013 and early 2014, the reference rates increased significantly, driving up the cost of funding, while efforts were made to renew loans with longer maturities at higher yield. As a result, monthly spreads moved from 2.42% in December 2013 to 2.78% in December 2014. Management guidance in 2014 is to sustain and improve the spread steadily to a normalised level close to the Turkish market conditions.

In Egypt, interest income of Bank Audi improved by USD 11.3 million, led primarily by a USD 24.7 million quantity effect partially offset by a price effect of USD 9.3 million, following a spread contraction from 3.38% in 2013 to 3.13% in 2014. Amid a decrease in the cost of deposits by 9 basis points, the contraction in the spread is better explained by a decrease in the average yield on portfolio securities following renewals at lower returns offsetting improvement in yield on other asset classes.

Evolution of Non-interest Income

Non-interest income increased by USD 110.2 million in 2014 (corresponding to a growth of 27.7%), broken down over increases of USD 54.8 million in Lebanese entities, USD 40.1 million in Odea Bank, USD 16.9 million in Private Banking entities, and USD 5 million in Bank Audi Egypt. 55.1% of the increase in non-interest income is accounted for by core commissions (59.4% of which attributed to Odea Bank, 28.2% to Private Banking entities and 9.9% to Bank Audi Egypt). Consolidated core commissions grew by 32.4% in 2014, reaching USD 247.7 million and representing 0.64% of average assets. Income from financial instruments and FX, including USD 18 million of cost of hedge on part of the investment in Turkey, accounted for 38.3% of the increase, with the remaining 6.7% representing additional other income.

In parallel, non-interest income from operations slightly increased, driven principally by increases in non-interest income from Retail and Personal Banking activities by USD 18.7 million, from Private Banking activities by USD 18 million, and from Commercial and Corporate Banking activities by USD 17.5 million. Within such a context, the resilience of non-interest income from operations underlines the solid fundamental of the diversified business model across geographies, noting that Management relentlessly seeks to improve 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 the MENA region at large, leveraging on the Group’s presence in all major regional markets, allowing to offer a differentiated service to customers with regional businesses.

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

Evolution of Non-interest Income

In relative terms, total non-interest income represented 38.4% of total income in 2014 (as compared to 37.1% in 2013) and 1.31% of average assets (as compared to 1.18% in 2013).

Evolution of General Operating Expenses

General operating expenses increased by USD 128.3 million (21.4%), to reach USD 728.8 million in 2014. The increase is broken down over USD 61.1 million in Lebanese entities, most of which is one-offs, USD 48.3 million at Odea Bank (as the Bank continued to expand its services offering and its network, with 17 new branches in 2014, and hired 286 new staff), USD 7.0 million at Bank Audi Egypt, and USD 9.2 million in Private Banking entities. The increase in general operating expenses at Bank Audi Egypt is essentially tied to the IT transformation plan underway, in addition to costs related to the roll-out of new branches and the hiring of 126 new staff.

The increase in general operating expenses in Lebanon is owed to USD 27.5 million of one-off staff expenses in the form of end-of-year indemnities adjustments and run rate of salary adjustments within the context of USD 14.8 million of various non-recurrent operating and depreciation expenses.

The increase in general operating expenses is also broken down over an increase of USD 92.5 million in staff expenses, USD 20.9 million in other operating expenses (within an increase of USD 15.2 million at Odea Bank) within a USD 14.9 million increase in depreciation and amortisation charges.

With total income increasing at a slightly faster pace than general operating expenses, the cost to income ratio improved from 56.1% in 2013 to 55.1% in 2014, driven primarily by Odea Bank. Once the latter reaches its cruise speed, the cost to income ratio is expected to achieve a normalised level within the range of 42-45%.

The table below presents a segmental breakdown of consolidated general operating expenses by development pillars:

Evolution of Non-interest Income

Evolution of Loan Loss Provision Charges

Net loan loss provision charges moved from USD 90.3 million in 2013 to USD 139.6 million in 2014, corresponding to an increase of USD 49.3 million, accounted for predominantly by an allocation of USD 44.5 million of additional provision charges in Odea Bank and an increase of USD 37.1 million at Lebanese entities, amid decreases in most other entities, particularly at Bank Audi Syria and Bank Audi France. The increase in provisions in Lebanon is due to provisioning on corporates booked in Lebanon for non-resident customers, amid the allocation of additional one-time provisions on retail loans following the adoption of the new Circular No. 383 by the Central Bank of Lebanon, although the said circular allowed for amortising of those provisions over several years. In Turkey, the increase in provisions is partly explained by the seasoning of the portfolio and an increase in provisioning on the retail portfolio within the context of an increasing allocation of collective provisions in order to gradually book collective reserves representing a targeted 75 basis points of the net loan portfolio.

Evolution of Income Tax

The consolidated effective tax rate of Bank Audi increased by 3% in 2014, moving from 20% to 23% and mirroring an increase in income tax by USD 28.7 million, broken down over USD 22.2 million of additional income tax from operations mainly at Odea Bank, Bank Egypt and Private Banking entities, amid USD 3.9 million of additional income tax in Lebanon tied to income tax on dividends from subsidiaries and deferred income tax.

Key Performance Metrics

The return on average assets stabilised at 0.90% at end-December 2014, while the return on average common equity improved from 12.6% in 2013 to 13.6% in 2014 in spite of the USD 300 million capital increase. Return ratios remain affected by Odea Bank, still in its investment period two years after launch, given the normal time lag between laid off operating expenses and expected revenues. Consolidated return ratios are hence set to improve with the normalisation over the coming period of Odea Bank’s profitability. The results of 2014 confirm that the Turkish subsidiary is poised for a sustained profitability growth in the coming years.

The evolution of activity and results in 2014 were mirrored in the movement of key performance metrics as follows:

Key Performance Metrics

Investment Considerations

Earnings per Share

Basic earnings per share are calculated based on the weighted number of common shares actually issued and net profits after tax. On this basis, Bank Audi’s basic common earnings per share reached USD 0.86 in 2014, as compared to USD 0.8 in 2013, corresponding to an increase of 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:

Investment Considerations

Common Book per Share

Common equity represents total equity less minority shares and 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 2013 and end-December 2014.

Investment Considerations

Common equity per share of Bank Audi increased from USD 6.25 at end-December 2013 to USD 6.96 at end-December 2014. On the basis of a closing price of USD 6.0 at end-December 2014, the common share is traded at 0.9 times the common book value, reflecting very low multiples with respect to regional peers trading at an average of 1.8 times book value.

4.4. Analysis by Main Development Pillars

The Bank’s activity and earnings growth in 2014 were driven by the Group’s main development pillars, in particular Turkey, but also Lebanon, Egypt and the Private Banking entities.

The tables below set forth breakdowns of the Bank’s assets, deposits, loans to customers and net earnings, by these development pillars:

Analysis by Main Development Pillars

Analysis by Main Development Pillars

In 2014, the Group was steadily on its way to reach its set target of a balanced breakdown of activity and earnings between Lebanon and abroad. By geography, the contribution of entities outside Lebanon to consolidated assets increased from 42.6% at end-December 2013 to 47.4% at end-December 2014, primarily as a result of the contribution of Odea Bank in Turkey. By development pillars, 49.3% of the Group’s consolidated assets were held by Lebanese entities (excluding Audi Private Bank) as at end-December 2014, as compared to 53.4% as at December 31, 2013, 26.4% by Odea Bank (as compared to 20.9% as at December 31, 2013), 10.4% by Bank Audi Egypt (as compared to 9.0% as at December 31, 2013), 7.4% by Private Banking entities (as compared to 9.3% as at December 31, 2013) and 6.6% by other entities (as compared to 7.5% as at December 31, 2013). The share of assets booked in investment grade countries increased from 28.6% at end-December 2013 to 32.5% at end-December 2014.

41.6% of consolidated net profits in 2014 were sourced from entities outside Lebanon. By development pillars, 52.7% of the Bank’s consolidated net earnings were contributed by the Bank’s operations in Lebanon, as compared to 77.9% in 2013, 16.4% by Bank Audi Egypt (as compared to 16.1% in 2013), 12.5% by Private Banking entities (as compared to 10.6% in 2013), and 13.9% by other entities, as compared to 9.9% in 2013. The contribution of Odea Bank to net consolidated profits reached 4.5% in 2014 as compared to a negative contribution of 14.6% in 2013, noting that Odea Bank generated its first net profits in May 2014, 19 months after the launch of the operations. The share of net profits booked in investment grade countries reached 13.0% in 2014, up from a negative contribution the previous year.

What follows is a brief discussion of the overall growth trends across main development pillars:

Lebanese Entities (excluding Audi Private Bank)

On the back of lingering domestic and regional uncertainties subduing economic growth in Lebanon to below its potential, Lebanese entities reported an assets increase of USD 1,374 million in 2014, reaching USD 20.7 billion as at end-December 2014 from USD 19.3 billion as at end-December 2013. This increase was sourced at the liability side from an increase in customers’ deposits of USD 535 million to reach USD 18.4 billion over an above an increase in shareholders’ equity of USD 406 million, mainly as a result of the USD 300 million common equity increase closed end-September 2014 and an increase in the revaluation reserves of fixed assets of USD 221 million to be added to the issuance of USD 150 million subordinated loans to the IFC in March 2014. The increase in deposits was mainly driven by foreign currency deposits representing the principal funding source of lending and increasing during the year by USD 690 million, to reach USD 14.1 billion. In parallel, deposits denominated in Lebanese Pounds contracted by USD 155 million, reaching USD 4.4 billion as at end-December 2013. The contraction in Lebanese Pounds deposits is mostly justified by the margin focus strategy adopted by Management in recent years and favouring the improvement in spread (via the decrease in the cost of deposits) over volume growth.

On the uses side, the loan portfolio reported a contraction of USD 203 million justified primarily by a USD 385 million decrease in loans booked in Lebanon for regional corporates, amid a limited risk appetite in the domestic market over the short term, awaiting an improvement in the prospects. Loans to customers reached USD 5.6 billion as at end-December 2014, as compared to USD 5.8 billion as at end-December 2013. At the loan quality level, the ratio of gross doubtful loans to gross loans moved from 4% at end-December 2013 to 4.6% at end-December 2014, while coverage of those loans by specific provisions increased from 60.7% at end-December 2013 to 79.8% at end-December 2014, amid the allocation of USD 60.9 million of net loan loss provision charges during the year. Justified in part by the lower gross loan base, the deterioration of the ratio in 2014 was triggered by Management’s decision to downgrade a number of corporate loans in Lebanon unrelated to any Lebanese risk but booked in Lebanon for non-resident corporates. In parallel, primary liquidity of Lebanese entities reached a high of USD 10.5 billion (including certificates of deposits), after increasing by USD 2.5 billion in 2014, representing 57.0% of customers’ deposits.

Within the context of a similar growth of assets in the Lebanese banking sector to reach USD 175.7 billion at end-December 2014, Bank Audi’s asset market share reached 11.8%. At the deposits side, the decrease in deposits in LBP at Bank Audi was met by an increase by USD 3.4 billion for the sector, leading to a corollary decrease in Bank Audi’s market share to 8.8%. In parallel, the increase of foreign currency deposits was in line with the sector, leading to a stabilisation of Bank Audi’s FX deposits market share at 14.8%. On the overall, Bank Audi’s deposit market share decreased by 0.4% to stand at 12.8% at end-December 2014. On the uses side, within a 7.4% growth in net loans in the sector, Bank Audi’s loan market share dropped by 1.2% to 11%.

In parallel, the share of foreign currency deposits in Bank Audi’s deposits in Lebanese entities moved from 85% at end‑December 2013 (including 55.8% in USD) to 87.5% at end-December 2014 (including 52.2% in USD), against the trend of commercial banks in Lebanon where the share of foreign currency deposits moved from 66.1% as at end-December 2013 to 65.7% at end-December 2014.

Lebanese entities generated USD 184.5 million of net profits after provisions and taxes in 2014, corresponding to a decrease of USD 52.8 million relative to 2013 net profits of USD 237.3 million. With total revenues increasing over the period by USD 49.3 million, the decrease in net profits stems primarily from an expansion in general operating expenses over the period of USD 61.1 million and USD 37.1 million of additional loan loss provisions charges. The increase in general operating expenses is broken down over USD 54.5 million of additional staff expenses, and USD 6.6 million of depreciation mainly related to the IT transformation plan underway within a USD 2 million impairment of the goodwill of the Egyptian on-line brokerage company Arabeya Online for Securities Brokerage. The additional staff expenses were mainly driven by USD 27.5 million of one-off expenses tied to exceptional non-recurrent compensation, the run rate impact of salaries adjustments effected late 2013 and end of service indemnities adjustments.

Bank Audi Egypt

The policies implemented so far in Egypt, the support of external donors, along with a return of confidence, are starting to produce a turnaround in economic activity and investment in Egypt, which so far led to an upward revision of real GDP growth by the IMF to 3.8% for the fiscal year 2014/2015, almost double its pace since the 2011 revolution. This translated into a two-digit growth in banking activity in 2014 allowing the anticipation of a strong growth over the medium term. Within this context, assets of Bank Audi Egypt grew by 33.1% in 2014, corresponding to an increase of USD 1,082 million to reach USD 4.3 billion, outperforming its budget. Assets growth was driven by USD 959 million of additional customers’ deposits, reaching USD 3.8 billion as at end-December 2014, met by an increase in high yielding portfolio securities of USD 524 million and in net loans to customers of USD 213 million to reach USD 1.8 billion at the same date. A quarterly evolution of net loans bears witness to the improvement in banking activity and the renewed optimism. After contracting by USD 34 million in the first quarter of 2014, net loans increased by USD 66 million in the second quarter, USD 76 million in the third quarter and USD 105 million in the fourth quarter. At the asset quality level, the ratio of gross doubtful to gross loans stabilised at 2.6% at end-December 2014, the same level as at end-December 2013, which is still below the average gross doubtful loans to gross loans ratio of the Egyptian banking sector (8.9% as at December 31, 2014).

As at end-December 2014, Bank Audi Egypt accounted for 2.2% of the overall assets increase in the sector (22.9%), as its market share increased from 1.35% as at end-December 2013 to 1.5% as at end-December 2014, consolidating its positioning as the 7th bank among private banks in Egypt. The latter was driven by an increase in the deposits market share from 1.52% to 1.81%, as Bank Audi Egypt’s deposits growth exceeds that of the sector, while the loan market share stabilised at its end‑December 2013 level of 2.05%.

In parallel, Bank Audi Egypt registered net profits of USD 57.6 million in 2014, rising by 17.2% (USD 8.5 million) relative to the 2013 results of USD 49.1 million. Based on the above, Bank Audi Egypt reported comfortable key financial metrics at end-December 2014, with a primary liquidity to deposits ratio of 18.5% (versus 15.4% at end-December 2013), a capital adequacy ratio of 16.1% (versus 16% at end-December 2013), a ROAA of 1.6% (same level as in 2013) and a ROAE of 18.9% (versus 18.7% in 2013).

The performance of Bank Audi Egypt in 2014 clearly reflects its capacity to deliver the 3-year development adopted late 2013 and its aim to double the assets size with a corollary growth of net earnings.

Odea Bank

In 2014, the contribution of Odea Bank to consolidated assets moved from USD 7.5 billion at end-December 2013 to USD 11.1 billion at end-December 2014, with a deposits contribution of USD 9.1 billion and a loan contribution of USD 7.8 billion. An analysis of Odea Bank’s performance in 2014 in Turkish Lira allows to offset the impact of the 7.8% depreciation of the Turkish Lira versus the USD recorded in 2014. Assets of Odea Bank continued on a solid growth path in 2014, moving from TL 16.1 billion at end-December 2013 to TL 25.6 billion at end‑December 2014, corresponding to an increase of TL 9.5 billion (i.e. a growth of 59.1%). In parallel, customers’ deposits reported a year-on-year growth of 70%, moving from TL 12.4 billion at end-December 2013 to TL 21 billion at end-December 2014. At the uses level, loans to customers grew by 58.8%, moving from TL 11.3 billion at end-December 2013 to TL 18 billion at end-December 2014. Subsequently, the loans to deposits ratio of Odea Bank stood at 85.4% at end-December 2014 (91.4% at end-December 2013), in line with the Group’s Management recommended level which remains below the 118% average of Turkish banks. Deposits and loans growth were supported by an improved granularity as the retail business grows to achieve its cruise speed. In fact, the contribution of retail loans to total loans moved from 6.5% at end-December 2013 to 9.6% at end-December 2014 on the back of a contribution of retail deposits of 57% at end-December 2014 (as compared to 54% at end-December 2013) .

The evolution of Odea Bank’s franchise also reflects its solid customer attraction and business development capacity, as witnessed by the evolution of the number of active customers increasing in 2014 by 226,614 and reaching 259,172 customers as at end-December 2014, the number of active accounts increasing by 503,514 accounts to reach 576,607 accounts as at end-December 2014, and the number of cards increasing by 369,551 to reach 472,772 cards of which 251,801 credit cards.

In 2014, Odea Bank’s growth rates exceeded by far those registered in the Turkish banking sector, with assets growing year-to-date by 59.1%, deposits by 70% and loans by 58.8% as compared to 15.1%, 11.3% and 18.5% respectively in the Turkish banking sector. Concurrently, Odea’s assets market share rose by 0.35% to stand at 1.3% as at end-December 2014, while its deposits market share increased by 0.69% to stand at 2.0% and its loan market share increased by 0.4% to 1.45%. Odea Bank’s outperformance allowed to consolidate significantly its market positioning, ranking 13th in just 26 months of operations. More significantly, Odea Bank’s deposit base became larger than that of HSBC and ING, both established in the Turkish market since more than 20 years, while enjoying large market visibility through a network of 300 branches each.

Notwithstanding the solid balance sheet momentum, the most important turnaround in Odea Bank’s performance in 2014 was registered in the month of May 2014, with the subsidiary recording its first positive net profits after provisions and taxes, moving firmly thereafter in a rising increase trend. Accordingly, Odea Bank reported net profits after provisions and taxes of USD 15.8 million in 2014, as compared to a negative contribution of USD 44.5 million in 2013, broken down over negative profits by USD 8.6 million in the first quarter of 2014, followed by net profits of USD 3.1 million in the second quarter and USD 11.4 million in the third and fourth quarters of 2014. On the backdrop of an allocation of USD 63 million of loan loss provision charges as compared to USD 18.5 million in 2013, those results are mainly justified by a 2.7-fold growth in total revenues amounting to USD 168.5 million, reflecting an improvement in spread of 74 basis points to reach 2.29% and in non-interest income generation (core commission) of 39 basis points to reach 0.67%.

Private Banking Entities

Private banking entities encompassing Audi Private Bank, Banque Audi (Suisse), Audi Capital Gestion (Monaco), Bank Audi Qatar and Audi Capital (KSA), reported an increase in assets under management and fiduciary deposits, hereafter AUMs, of USD 969 million, moving from USD 5.9 billion at end-December 2013 to USD 6.9 billion as at end-December 2014. By entity, AUMs of Audi Capital in Saudi Arabia drove the increase in total AUMs, reporting an increase by USD 515 million, followed by Banque Audi (Suisse) registering an increase of USD 254 million (and almost USD 290 million when adjusting to the depreciation of the Euro versus the USD), with AUMs of Audi Private Bank increasing by USD 165 million. The increase in assets under management reflects new money booked in 2014 by USD 735 million, of which USD 484 million in Audi Capital, USD 68 million in Banque Audi (Suisse) and USD 182 million in Audi Private Bank. The evolution of AUMs along the improvement in operating conditions following the implementation of the adopted restructuring plan, allowed the Private Banking entities to report USD 43.8 million of net profits in 2014, up from USD 32.3 million in 2013, and representing a 35.6% year-on-year growth.

4.5. 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 Personal 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. A detailed description of the business segment reporting methodology is provided in Note 4 of the Consolidated Financial Statements.

In parallel, the implementation of an Integrated Finance and Risk Management System (IFRM) aiming at unifying the source of information and data serving the business, is currently underway with Phase I of the said implementation already completed. This would ultimately allow risk and finance to produce analytical tools with a greater granularity, assisting the decision-making process, along with clear benefits for ALM, fund transfer pricing and profitability management. Please refer to Section 7.2. for further details.

The performance of the four principal business segments of Bank Audi in 2014 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. Despite the continuing challenging economic and political conditions prevailing in several key markets that triggered a slow down in new lending in some markets and a decrease in exposure in other markets, Bank Audi still managed to increase its loan portfolio. This was achieved through Bank Audi’s expansion of its corporate presence into Turkey, thus further strengthening its regional franchise.

In fact, Turkey and Egypt continue to be the main growth drivers for the corporate and commercial activity of the Bank. Total assets generated by the corporate and commercial segment at group level reached USD 13,409 million at end‑December 2014, up 12.6% from the level achieved at end-December 2013 (USD 11,905 million).

In Turkey, Bank Audi (via its subsidiary Odea Bank) initiated relationships with top tier corporate and commercial clients in a wide range of sectors including healthcare and education, construction and real estate, textile and other manufacturing industries, oil and gas, energy, retail and commercial development, tourism, as well as transportation and logistics. The corporate and commercial loan portfolio of Odea Bank stood at USD 7,028 million as at end-December 2014.

Egypt remains the other key focus for growth at the corporate and commercial levels. Bank Audi Egypt’s lending activity covers a wide range of corporations in the fields of higher education, fertilizer production, oil and gas, real estate development, steel manufacturing, pharmaceuticals, and airlines. The corporate and commercial loan portfolio of Bank Audi Egypt stood at USD 1,346 million as at end-December 2014.

In Lebanon, Bank Audi continued supporting the growth of many local businesses by building a strong relationship with the existing customers and increasing penetration to large corporates. Bank Audi continues to be the largest commercial and corporate lender in the Lebanese sector, with a corporate and commercial loan portfolio standing at USD 4.1 billion at end-December 2014.

Based on the above, the corporate and commercial business generated total revenues of USD 445.1 million in 2014, as compared to USD 319.5 million in 2013, corresponding to a growth by 39.3%. The USD 125.6 million increase in total revenues is mainly attributed to a USD 99.2 million increase in interest income, driven by an improvement in spread following the re-pricing of loans, along with a slower increase in non‑interest income of USD 26.3 million.

During 2014, Bank Audi updated its Environmental and Social Management System (ESMS) to actively manage environmental and social risks and to promote environmental business opportunities. A process was set to evaluate the environmental and social impacts of client operations and activities financed by Bank Audi. Any lending activity with either serious adverse effects on the environment or serious negative social impacts shall not be supported. This applies to the Bank’s Corporate, Commercial and Investment Banking lending activities.

Also, the Bank requires compliance with national environmental standards in the countries in which it operates. In specific instances where national standards are absent or considered insufficient, internationally accepted environmental and social standards should be considered.

Retail and Personal Banking

In 2014, the Retail Banking activity continued to be focused on implementing the strategy of transforming the business to become a truly customer-centric organisation. To that end, new service models and customer segmentation initiatives were implemented across pillar markets, supported by the expansion of delivery channels, the introduction of innovative technologies and the customisation of existing products and services. Those initiatives aimed first and foremost at enhancing customer experience, transparency and profitability, and improving customer retention while growing the retail lending exposure in compliance with the approved internal risk limits. With 180 branches and 400 advanced ATMs catering for more than 900,000 clients, supported by an entrenched pool of talent and a comprehensive product offering, Bank Audi is one of the leading banks of choice in the region.

In Lebanon, the Bank initiated the roll out of a new operating model across the domestic network, based in particular on a customer segmentation initiative and a channel behaviour analysis. Deeper customer insights catered for an increased marketing focus and tapped into unexploited potential. Within that scope, several impactful customer care events based on detailed customer feedback from advanced analytics have been executed, such as the 25 Years Tenure event, the Labour Day event and the Festive Season event, allowing to nurture relationships and readily satisfy the changing needs of clients. In parallel, Bank Audi Lebanon focused on enhancing customer experience via the introduction of increased functionalities on alternative delivery channels through:
  • The roll out of a new state-of-the-art online banking platform with a new user friendly interface.
  • The inauguration of a Novo branch in an ultra-modern space located at our Palladium head office, showcasing the latest banking technologies such as the ITM (Interactive Teller Machine), a Novo advisory room providing full customer service capabilities, and instant card issuance capabilities. At end-December 2014, the Bank had at total of 8 operational Novo branches located primarily in Greater Beirut. At the level of e-Payment solutions and Card Services (EPCS), the Bank’s main focus in 2014 was to build the foundation for a cashless society by creating pioneering payment landscapes and business solutions evolving with customers’ needs and international market trends. These solutions covered:
  • Contactless payment solutions under the umbrella of the “Tap2Pay series of payments” through different devices and channels (cards, mobiles, stickers, wearables), allowing to securely process transactions simply by tapping or waving different devices in front of a contactless reader.
  • Building a contactless infrastructure to allow the merchants to accept contactless transactions.
  • An “e-Payment” solution that offers merchants, companies and the private sector a single and secure internet payment solution for all their processing needs. Recent launches were the “Ogero” online payment solutions, the bill payment solution for “Alfa and Touch”, and the “Park Meter” fines online payment.

Keeping at par with the latest trends, Bank Audi launched an “e-gallery”, a first of its kind in Lebanon, showcasing the latest payment technologies and serving as an educational venue for young generations through workshops tackling the history of plastic money and interaction with the latest payment technologies.

The advanced systems and expertise, coupled with customer service excellence provided by EPCS, allows the Bank to continue to be the partner of choice of Visa and MasterCard for piloting any new innovation in the Arab world.

Based on the above and on the perception of having the best brand image in the domestic market, the Bank’s customers’ market penetration reached 20% in 2014, ranking first among competitors, while its consumer lending exceeded 10% and the cross sell ratio per individual peaked at an all time high of 4.34. Also, the Bank continued to rank first in the issuance of debit and credit cards, with a market share of 38% in volume of spending and 43% in merchants sales volume.

In 2014, Bank Audi Egypt carried on building on the solid foundation that was established in the previous years, with new product launches and branch openings. The adopted customer focused and value-added approach has enabled the institution to continue on its journey to become a key player in the Retail Banking market in Egypt. The achieved track record in delivering simple, leading and innovative products supported a strong financial performance at this level.

In 2014, the retail operating model in Egypt initiated its transformation, taking into consideration a customer life cycle segmentation strategy focusing on lifetime value delivery to the customer. As a result, new ”bancassurance” life products were introduced in cooperation with Egyptian Life Takaful – GIG, in addition to the launch of a World MasterCard card (a premiere in Egypt) enhanced with a generous bundle of facilities, benefits and a wide range of new loans programs meeting the needs of a broad spectrum of clients. In parallel, two new saving accounts with unique value proposition catering to specific target segments were introduced (Mega Saver and Star Saver), triggering a 32% growth in individual deposits.

Odea Bank continued its successful launch of Retail Banking activities in 2014, supported by its motto of “Not Everyone’s but Yours”. Despite being a newcomer in the competitive Turkish market, the Bank was able to attract 450,000 retail customers and book TL 12 billion worth of retail deposits through a network of 48 branches, supported by an innovative and solution-oriented strategy.

Retail Banking activity in Turkey is focused around the provision of wealth management services, card services and retail lending services. Wealth management activity aims at providing premium targeted services executed on a state-of-the-art platform, developed for the first time in Turkey, combining access to a vast variety of funds and comprehensive research. The offering is supported by a variety of “bancassurance” products and services conceived in collaboration with Aviva SA Emeklilik ve Hayat A.Ş., AXA Sigorta A.Ş., and MetLife Emeklilik ve Hayat A.Ş.

At the card business level, Odea Bank made a rapid entry into the market, with the awards-winning Bank’O Card and the Bank’O Card Axess reaching more than 250,000 cards issued by end-December 2014. The success of this business is justified by the appealing products features and dedicated campaigns allowing to attract a large number of clients.

In parallel, the consumer lending strategy was based on the provision of in-sourced lending products and services customised and readily available to customers on highly technological platforms allowing instant underwriting and a tight quality monitoring. Three new lines of products were introduced in 2014 and covered:
  • Nakit Hazir, an immediate credit facility granted through the branches but also through direct sales SMS, websites and call centres. This product will benefit from the extension in 2015 of the channel reach through the agreement with the (PTT) postal office present across the Turkish territory.
  • Mortgage plans through exclusive deals with development projects and special payment plans for development projects.
  • Instant loan facility granted in chain stores across Turkey (“Trink’O”) and supported by strategic collaborations with selected chain stores, bringing the number of its “in-store branches” in 2014 to 8 while boosting the number of instant loan access points to 260.

Based on the above, consolidated retail loans reached USD 2.8 billion at end-December 2014, achieving a year‑on‑year growth of 37.7%, driven primarily by Odea Bank. This growth reflects a 40.4% growth in housing loans, 36.5% growth in personal loans, 12.4% in credit cards, and 9.9% in car loans. The growth of the consolidated retail portfolio was not achieved at the detriment of its quality, with the gross doubtful retail loans to retail loans reaching 3.4% at end-December 2014, a level still below the Group’s risk limit, with a coverage of those loans by specific provisions of 73.7%, while collective provisions represented 0.9% of retail loans.

Private Banking and Wealth Management

Audi Private Bank is the wealth management arm of Audi Group and one of its strategic key growth drivers next to its three key geographies (Lebanon, Turkey, Egypt). It operates through three main booking centres based in Switzerland, Lebanon and Saudi Arabia, with additional offices in Monaco, Qatar, Jordan and the United Arab Emirates. Deep-rooted in the Middle East and Africa region, Audi Private Bank’s leading position in the wealth management business sets it apart from its peers and is of significant value for clients seeking investment knowledge and expertise in the region.

In 2014, Private Banking continued its successful expansion in the Middle East, especially in KSA and Egypt, as well as in Africa, Turkey, and Latin America. Moreover, it expanded its reach within Lebanon through developing more synergies and cooperation with the domestic branch network. The wealth management business of Bank Audi puts particular emphasis on investment content, developing diversified and competitive solutions to high net worth individuals within the strategic regions on a discretionary, advisory or execution basis.

Excluding extraordinary income recorded in 2013, Private Banking total revenues in 2014 exceeded USD 130 million, a 19.6% growth which resulted in a profit after tax growth of 35.4%. The consolidated assets under management booked in the Private Banking entities reached USD 10.1 billion at end-December 2014, an 8.7% year-on-year growth.

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 remains the leading international market maker in Lebanese securities, namely in Republic of Lebanon Eurobonds and Lebanese Treasury notes, with an annual turnover of USD 8.4 billion in 2014. Over and above, the Bank was a co-lead manager of a new Lebanese Eurobonds issuance in April 2014. As for equities, it accounted in 2014 for a 57.2% market share on the Beirut Stock Exchange. 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 papers comes in a current global environment where fund managers are searching for high yields 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 Markets activities increased by 23.6% in 2014, reaching USD 20.4 billion at end-December 2014. In parallel, total revenues of this business segment grew by 8.2% year‑on-year, moving from USD 564 million in 2013 to USD 610 million in 2014.

4.6. Capital Management

Bank Audi adopts a long-term view on capital focusing on:
  • Ensuring that capital sufficiently covers all material risks generated by the Bank’s activities.
  • Protecting depositors in case of stress events.
  • Factoring in the requirements of various stakeholders including regulators, rating agencies, depositors and shareholders.
  • Optimising the capital usage while providing support for the expansion of business segments and entities.
    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 rose by USD 651 million in 2014, mainly as a result of the completion of the USD 300 million capital increase at end-September 2014 (please refer to the section on Shareholders’ Equity for further details), and USD 221 million of additional reserves for revaluation of fixed assets booked in accordance with BDL Intermediary Circular No. 44, within the context of USD 30.2 million of proceeds from the liquidation/sale of AZA Holding based on the terms of the shareholders’ agreement, USD 72.6 million of reduction in the Treasury stock position and USD 160.1 million of internal capital generation, totally offsetting the USD 101.1 million of additional negative changes in group share foreign currency translation reserves. The consolidated shareholders’ equity of Bank Audi reached USD 3.3 billion at end-December 2014, broken down over USD 2.1 billion of common Tier 1 equity, USD 504 million of additional Tier 1 equity, and USD 643 million of Tier 2 equity. Adding to equity the USD 500 million of subordinated debt accounted by Basle III as Tier 2 capital, the Bank’s gross regulatory capital would reach more than USD 3.8 billion.

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 Basle III framework, setting higher capital requirements to be achieved gradually in phase-in arrangements, as described below:

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

During 2014, the Central Bank of Lebanon issued Intermediary Circular No. 358 whereby it reduced the risk weight on foreign currency deposits and reserve requirements at the Central Bank of Lebanon from 100% to 50%. Also in this circular, the Central Bank of Lebanon allowed banks to account within their regulatory capital 50% of unrecorded real estate revaluation amount, provided a similar cash amount is injected into 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 (which must be met from core common Tier 1), that comes on top of the minimum regulatory total CAR (set at 10% in 2015) and represents 2.5% in 2015. As per regulation, should the Bank dip into the conservation buffer at any point in time, it should put a plan to cover the shortage within a defined period of time and seek the Central Bank’s approval.

Based on this circular effective end-December 2013 and including profits, the Bank’s capital adequacy ratio would stand at 13% at end-December 2014, as compared to a 9.5% regulatory requirement (11.5% including the conservation buffer). The capital adequacy ratio is broken down over 8.8% of core common Tier 1 ratio, 2.1% of additional Tier 1 ratio and 2.2% of Tier 2 ratio. Within a 13.7% increase in risk‑weighted assets, the evolution relative to end-December 2013 (12.1%) is justified by the USD 465 million increase in core Tier 1 capital during the year, of which USD 300 million of common equity increase mentioned above, in addition to an increase in Tier 2 capital of USD 117 million, of which USD 150 million of subordinated debt issued to the IFC in March 2014.

Once the regulatory approvals for including the allowed effect of the asset revaluation in Tier 2 capital are obtained, the Tier 2 capital would increase from USD 532 million to USD 644 million, corresponding to a Tier 2 ratio of 2.64%. Accordingly, total capital ratio would reach 13.5% at end-December 2014.

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

Regulatory Requirements – ICAAP

During 2014, the Bank prepared its annual Internal Capital Adequacy Assessment Process (ICAAP) report and submitted it to Senior Management, the Board Group Risk Committee and the Board of Directors. The Bank views 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. The Bank continues to build on the approaches used in previous ICAAP submissions to further develop and refine various risk methodologies and include 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.