ANNUAL REPORT
2016

STATEMENT OF THE CHAIRMAN
AND THE CHIEF EXECUTIVE OFFICER

Bank Audi’s 2016 results confirm once again the high resilience of the Group in its capacity to withstand adverse developments in its markets of presence and to sustain favourable growth in activity and net profits parallel to the reinforcement of the Bank’s fundamentals and financial flexibility.

The Bank actually maintained in 2016 a sound activity growth in a tough operating environment. Consolidated assets of Bank Audi increased from USD 42.3 billion at end-December 2015 to USD 44.3 billion at end-December 2016, corresponding to a rise of USD 2.0 billion, i.e. a growth of 4.7%. This performance was nonetheless impacted by the depreciation of the Egyptian Pound and the Turkish Lira versus the US Dollar by 58% and 18% respectively in 2016. Had the exchange rate of those currencies been the same at end-December 2016 than at end-December 2015, consolidated assets of Bank Audi would have increased by USD 6.1 billion, corresponding to a growth by 14.4%. Accounting for assets under management, fiduciary deposits and custody accounts, consolidated assets would reach USD 55.1 billion.

In parallel, consolidated deposits rose from USD 35.6 billion at end-December 2015 to USD 36 billion at end-December 2016, corresponding to an increase of USD 346 million, while consolidated net loans contracted by 4.0%, reaching USD 17.2 billion at end-December 2016. Those performances were again affected by the depreciation of the Egyptian Pound and the Turkish Lira, since on the basis of a constant exchange rate, consolidated customers’ deposits would have increased by USD 3.6 billion (+10%) driven primarily by entities operating in Lebanon, while loans to customers would have increased by USD 1.5 billion (+8%), driven by an increase in loans in entities operating in Lebanon, Turkey and Egypt.

The Bank’s growth was not realised at the detriment of its financial standing which continued to bear witness to a strong financial soundness in the realms of liquidity, asset quality, capitalisation and profitability. At the level of liquidity, consolidated primary liquidity placed with central banks and foreign banks was further reinforced, increasing by USD 5.3 billion in 2016 to USD 21.8 billion, the equivalent of 60.5% of consolidated customers’ deposits, a high level when compared to regional and global averages.

At the level of asset quality, lending growth was coupled with a strengthening of the lending portfolio quality, as Management took USD 441 million of net loan loss provision charges in 2016, of which USD 306 million in the form of collective provisions taken in implementation of the Central Bank of Lebanon’s directives in preparation of IFRS 9 directives. Subsequently, collective provisions reached USD 419 million at end-December 2016, representing 2.9% of risk-weighted loans and 2.43% of net loans, against 0.9% at end-December 2015. In parallel, gross doubtful loans represented 2.4% only of gross loans ratio (improving from 2.9% at end-December 2015) while the coverage of those loans by specific provisions maintained its 68% level, rising to 102% when accounting for real guarantees. As such, the net doubtful loans to gross loans ratio improved from 0.93% at end-December 2015 to 0.8% at end-December 2016.

At the capitalisation level, consolidated shareholders’ equity of Bank Audi strengthened by USD 411 million, from USD 3.3 billion as at end-December 2015 to USD 3.7 billion as at end-December 2016, the highest in the Lebanese banking sector. As at end-December 2016, consolidated shareholders’ equity represented 8.4% of consolidated assets as compared to 7.8% as at end-December 2015. The increase in shareholders’ equity was mirrored at the level of regulatory equity rising by USD 573 million in 2016, to USD 3.9 billion. Subsequently, total capital adequacy ratio hiked from 13.36% at end-December 2015 to 14.78% at end-December 2016 in spite of the adverse impact of the depreciation of Turkish Lira and the Egyptian Pound versus the US Dollar, a level exceeding the 14% minimum regulatory ratio.

At the profitability level, Bank Audi achieved around USD 1 billion of exceptional non-recurring revenues as a result of its participation in the exchange transactions offered by the Central Bank of Lebanon for a limited period of time and with enticing conditions. As per Banque Du Liban’s directives (Intermediary Circular No. 446), Bank Audi used those exceptional revenues to allocate additional collective provisions representing 2% of risk-weighted loans, as well as to book impairment of goodwill and intangibles assets in a number of entities. In addition, the Bank wrote off its investments in Syria and Sudan, which entails bearing impairments while realising the related foreign currency translation losses, which were already accounted for in common equity. Having met all the requirements of the Central Bank, the Bank was left with a remainder amount of USD 173 million (USD 204 million before tax) which was allocated over 70% as non-distributable reserves for capital increase (USD 121 million) and 30% as deferred liabilities, which would be accounted for as Tier 2 capital (USD 52 million). The above treatments increased shareholders’ equity by USD 200 million while regulatory capital increased by USD 426 million.

In parallel, consolidated net profits moved from USD 403 million in 2015 to USD 470 million in 2016, a growth of 16.6% year-on-year. Despite challenging operating conditions regionally and globally, Bank Audi succeeded in 2016 to improve its spread by 20 basis points, amid a stable non-interest income generation relative to average assets before exceptional revenues, driving a similar increase in asset utilisation ratio to 5.04%. On the backdrop of improving net operating margin, the Bank’s return on average assets ratio rose to 1.1%, while the return on average common equity improved by 1.06% to 14.7% in 2016.

In sum, Bank Audi believes that in 2016, it has once again succeeded to reach its main purpose of achieving quality growth by efficiently meeting the needs of both businesses and individuals in the various countries of presence and ensuring long-term sustainable value to all stakeholders, while also reinforcing the Group’s fundamentals. The Group is continuously looking to become more and more a privileged partner to customers through the provision of a wide, universal and innovative bank offering mix at the service of individual and corporate customers.
Indeed, as a result of successive restructuring and expansion strategies, the Bank has significantly reinforced its presence in Lebanon, throughout the MENA region and in Turkey, as well as diversified the range of its products and services to cover all the activities traditionally carried out by a universal bank, in particular:

  • A strong franchise in Corporate and Commercial Banking, Retail and Individual banking, Private Banking and Wealth Management, as well as Treasury and Capital Market activities and a well-known profile throughout the MENA region. By end-December 2016, the Bank had a loan portfolio of USD 17.2 billion, well diversified over economic sectors; a wide spectrum of 195 retail products and services covering bancassurance, credit card and Internet Banking, offered in all countries where Bank Audi operates and supported by a network of 201 branches and 478 ATMs; a leading position in Private Banking, with more than USD 10.8 billion in AuMs, by far the largest portfolio managed by a Lebanese banking group and which compares competitively with portfolios managed by leading banks in the GCC; a strong Capital Market activities in Lebanon, reporting an annual turnover of circa USD 16.7 billion in 2016.
  • A strong diversification of operations by geography, with a presence in seven countries across the MENA region and Turkey, and clients which include leading corporations across a number of industry sectors.
  • A leading position in its key markets, including ranking first among private sector conventional banks in Lebanon, sixth in Egypt and ninth in Turkey.
  • An experienced Risk Management team, with a focus on risk governance and a number of risk management committees at the Board and Senior Management levels, which support the determination and monitoring of the Group’s risk philosophy and appetite.
  • Strong Corporate Governance and transparency structures and practices, which have been recognised as among the first and best in the region; and
  • A diversified shareholder base which includes historical shareholders, international institutional investors and individuals from the region.

Maybe one of the most important developments at the level of Bank Audi’s business activity in 2016 was the launch of a new proposition in SME Banking in August 2016, encompassing a comprehensive array of products and services, and which is expected to become a major business line. The new SME solutions were designed in a flexible manner to better answer customers’ lending and non-lending business needs, from business banking transactions to financing solutions for day-to-day running business needs, as well as business growth and capital expenditure requirements. The revamping of the Bank’s proposing was implemented with the advice of the IFC and aimed at promoting a sector which has a substantial impact of the domestic economy, representing 90% of the enterprises in Lebanon and employing 82% of the work force in the private sector. Hence serving this sector is not only profitable for Bank Audi, but it also promotes overall job creation and supports economic growth.

It is important to mention that the results of the past year and the strategic directions of our Group are being supported by significant developments in support functions, such as IT and HR.

At the IT level, Bank Audi IT continued the implementation of multiple transformational business and technology projects across many of its affiliates. In Lebanon, phase 1 of the Omni-channel banking platform, a state-of-the-art mobile banking platform and application, was made available to customers. In addition, implementation work continued on several strategic projects: core banking replacement, subsequent phases of the Omni-channel banking platform, new automated business process management and loan management systems, and a new customer relationship management system. When operational, these systems together will redefine the way the Bank produces and delivers state-of-the-art services to its customers. Lastly, Bank Audi IT has increased over the past year its efforts to research and develop the latest trends of technology, the future of banking, and the means to implement those findings in existing and potential new entities.

At the HR level, if the year 2016 were to be labeled, it would easily hold up to the title “Human Resources Upgrade” in the Group’s main entities. Distinguished and rich accomplishments were witnessed during the year within the Human Resources Department. Following three years of engaged efforts and dedication, the e-Business Suite Human Resources Management System (HRMS) – a state-of-the-art, versatile yet user-friendly software – was successfully launched at the beginning of 2016, driving transformation and change at the level of the Bank. In parallel, the Training and Development efforts remained predominantly focused on the personal and professional development of employees, in compliance with the beliefs and culture prevailing in Bank Audi Lebanon.

In closing and on behalf of the Bank’s Board of Directors, we would like to express our gratitude to all our staff who have helped move Bank Audi forward to the point where we stand now, and to all our customers who honour us with their confidence and trust.