Activity Highlights as at End June 2011.

Beirut, 21 Jul 2011
In the first half of 2011, Lebanon’s economic activity reported signs of slowdown due to the environment prevailing in the region. Main real sector indicators reported decreases relative to the corresponding period of 2010, suggesting a lower GDP growth forecast in 2011 than in 2010. The banking sector yet pursued a somehow different trend. Bank deposits grew by US$ 3.3 billion over the first five months of 2011, a level almost equivalent to that reported in the corresponding period of last year. This growth was partially driven by the sustainability of capital inflows even though at a relatively lower pace, with an average of US$ 1 billion per month year-to-date. The corollary available liquidity allowed banks to extend new waves of loans, amounting to US$ 2.5 billion in the first five months of 2011.

At the level of regional countries where the Group is also actively present, economic conditions deteriorated for countries under turmoil, as witnessed by the evolution of main real and monetary sectors indicators. Such spillovers are yet believed to be of short term nature, as the medium term outlook looks better. More freedom and democracy is apt to improve political governance and subsequently economic efficiency.

In parallel, GCC counties are enjoying much better conditions. Boosted by the hike in oil prices, real and monetary sectors are registering high growth rates. Undoubtedly, those performances have favorable spillovers on Lebanon and the countries of the Levant region through the labor market channel and the subsequent remittances.

Within this context, Bank Audi achieved in the first half of 2011 a favorable performance. Net consolidated earnings grew by 10.8% relative to the corresponding period of 2010 despite an increase in net loan loss provision charges by 67% over the same period.

On the background of an unfavorable regional economic environment, this good performance is the result of opposite trends :
  • A good performance in Lebanon driven by the improvement in operating conditions in the aftermath of drastic efforts undertaken in 2010 to reduce the cost of funds and improve interest margins,
  • A decrease in net profits of regional entities, not due to contracting revenues which on the contrary displayed high sustainability levels, but tied to higher collective provisions taken in those entities as a precautionary measure in the event of further spillover effects of recent political developments.

Throughout the first half of 2011, the Bank adopted a conservative strategy on a group level, focusing on consolidating the customer franchise while adopting a rigorous risk management policy anchored over sustaining the best asset quality along with maintaining high liquidity levels.
  • Consolidated assets increased by US$ 394 million over the period, reaching US$ 29.1 billion at end-June 2011 and US$ 39.7 billion when accounting for fiduciary deposits, security accounts and assets under management. This assets size sustains Bank Audi’s position as the largest bank in Lebanon and among the top 20 Arab banking groups.
  • Consolidated deposits increased by US$ 420 million, to reach US$ 25.3 billion at end-June 2011. This is a favourable performance in view of the slowing down deposit growth in Lebanon and the contracting deposit bases of Syria and Egypt.
  • Shareholders’ equity amounted to US$ 2.3 billion, representing 21% of the consolidated equity of the Lebanese banking sector and translating into a Basel II capital adequacy ratio of close to 11.3%, as compared to the 8% minimum regulatory requirement.
  • Despite the volatile environment, the Bank’s credit quality continued to be resilient, as gross doubtful loans represented 2.5% of gross loans, with the coverage of those loans by specific loan loss provisions increasing from 72.6% at end-December 2010 to 80% at end-June 2011. Net doubtful loans to gross loans fell from 0.61% to 0.50% over the same period.
  • The improvement in loan quality indicators results from the allocation in the first half of 2011 of US$ 43.3 million of provisions, of which mainly collective provisions in the Syrian and Egyptian subsidiaries as a precautionary measure in the face of regional development spillovers. At end-June 2011, total collective provisions reached US$ 69 million, the equivalent of 0.81% of net consolidated loans as compared to 0.72% at end-December 2010. As a matter of fact, total loan loss reserves reached US$ 198 million at the same date, corresponding to 2.2% of gross loans. Still, the settlement ratio for retail lending dues across the Group represented on monthly average 94.8% in the first half of 2011, a satisfactory level under normal conditions.
  • Primary liquidity placed with central banks and banks reached US$ 13.3 billion, representing 52.8% of customers’ deposits, one of the most elevated liquidity levels in the region.
  • Overall efficiency strengthened as a result of sustaining the levels of revenue streams especially in entities in the MENA region, parallel to the stabilisation of the cost bases of those entities. Consequently, the cost to income ratio improved by 0.6%, moving from 46.6 % in the first half of 2010 to 46% in the first half of 2011.
  • Net earnings reported US$ 179 million for the first half of 2011, as compared to US$ 162 million for the corresponding period of 2010, growing by 10.8% despite an increase in net loan loss provision charges by 67% over the same period. In parallel, profits before provisions and taxes grew by 15%, moving from US$ 225 million in the first half of 2010 to US$ 259 million in the first half of 2011. Subsequently, earnings per common share grew by 8.8% over the same period, from US$ 0.44 to US$ 0.48 respectively.
  • Profitability ratios were sustained, with the return on average assets standing at 1.3% and the return on average common equity reporting 16.4%.

The performance of the first six months of 2011 highlights the strong level of resilience in the face of unforeseen developments in countries where the Bank is present. The sustainability of revenues of the various entities continues to ensure to the Group the needed financial flexibility to maintain a good financial standing. The additional loan loss provision charges, taken in the first half of 2011 as a precautionary measure in the face of political developments, did not prevent the Bank from posting positive earnings growth relative to the corresponding period of 2010. Within this context and given the more reassuring medium term outlook , the Group continues to pursue its consolidation strategy in Lebanon where it holds the leading position along with its expansion strategy in the MENA region where it aims to become a reference player.

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