BLOM - Current price*: USD 9.14

Equity Research March 2nd, 2011 - Target price: USD 12.00

Sector : Banking - Recommendation: OVERWEIGHT Countr y:

Conservative approach to growth and high cost- Share Data efficiencies to translate into favorable stock returns Common shares listing: Stock Exchange Ticker symbol: BLOM GDRs listing: BSE & Luxembourg Stock Exchange A prominent player in Lebanon, with a significant presence abroad Ticker symbol: BLBD With a conservative approach to growth revolving around a predominantly organic growth strategy, Market cap*: USD 1,965.1 mn a cautious lending activity and a tight cost-control policy, Blom Bank gradually grew to become Number of common shares: 215.0 mn one the leading players in the Lebanese banking sector, where the Bank currently operates a nd Estimated float %: 55% network of 71 branches and ranks 2 in terms of assets, deposits and loans while delivering one the 12-month average daily volume 43,746 highest profitability ratios in the market. With its expanding international reach, Blom Bank currently operates a network of 87 branches abroad spread in 11 European and Middle-Eastern countries outside Lebanon.

Share Price Information* Two-pronged organic growth strategy by business line and geography to become a leading bank in the region ∆ YTD -2.77% The Bank has added to its traditional business model (retail and commercial) a wide range of ∆ 1M -11.86% banking services including asset management, , insurance and Islamic banking. ∆ 3M +1.56% Furthermore, Blom Bank has, beyond its decades old presence in Europe, embarked on a regional ∆ 12M +1.56% expansion starting in the early 2000’s by (i) adding footprints in key Levant markets (Syria, Egypt 52 – Wk range USD 8.50 -10.45 and Jordan) for retail and commercial banking and (ii) more recently, establishing a presence in the

nd GCC (KSA and Qatar) in view of further developing its investment and private banking activities. *Blom Bank shares as of market close on March 2 2011 Blom Bank generates 15% of its profits abroad and is targeting an equal share between domestic and foreign operations over the medium term, seeking to become a leading regional bank. Share Price Performance Solid results in 2010 draw a positive outlook for the coming years 11 While Blom Bank saw a moderate balance sheet expansion compared to previous years, 2010 remained solid in terms of lending and bottom line income growth. Assets and deposits grew by 8% 10 and 9% respectively in 2010 while lending activity was robust, registering a 29% progression over 9 the same period. The Bank’s assets, deposits and loans amounted to USD 22,336 million (mn), USD 19,553 mn and USD 5,180 mn respectively. Net profits totaled USD 331 mn for 2010, 13% USD 8 higher yoy.

7 Expect continued balance sheet growth and earnings generation over the medium term Between 2010 and 2012e, we anticipate Blom Bank will grow its assets at 10.8% CAGR to USD 6 27.5 billion (bn), following a similar CAGR (10.5%) for deposits expansion to reach USD 23.9 bn. M M Ju S N Ja M We expect private sector lending to remain dynamic judging by a CAGR of 15.6% to USD 6.9 bn a a l ep o n a r- y -1 - v- -1 r- over the same period, which should be mainly driven by sustained economic activity in its domestic 1 -1 0 10 1 1 1 0 0 0 1 market, and efforts for a more diversified asset mix away from sovereign securities and lower yielding bank placements, as well as from the contribution of foreign entities. Coupled with this continued trend for balance sheet growth, we expect improvements in interest spreads and cost- efficiencies, which should translate into net profits growing at a ~14% CAGR to reach USD 430 Key Performance Indicators mn in 2012e.

We like Blom Bank’s high returns and improving risk profile and view the valuation of its in USD millions 2009a 2010a 2011e 2012e shares as attractive Net Interest Income 419 495 551 622 We recognize Blom Bank’ solid positioning in its domestic market and improving risk profile stemming from its efforts at better earnings diversification across products and markets. We like the Non-Interest Income 148 185 216 256 firm’s superior profitability and return ratios in Lebanon relative to its domestic peers despite Net Profits 293 331 376 430 sizeable liquidity buffers. We notice improving credit quality and yoy cost-efficiency ratios despite a growing asset base, a validation of management's conservative approach and capacity to improve ROAA (%) 1.52% 1.54% 1.59% 1.65% less performing foreign operations. ROAE (%) 18.5% 18.3% 18.4% 18.6% BVPS 7.55 8.46 9.67 10.98 We rate Blom Bank shares at Overweight with a fair value estimate of USD 12.00 per share Based on our revised forecasts and discount rate assumptions to our Dividend Discount Model, our EPS diluted 1.29 1.42 1.62 1.87 fair value estimate is USD 12.00 per share, which implies a P/B of 1.24x on our book value per P/BV (x) 1.21x 1.08x 0.94x 0.83x share 2011 estimates, in line with its 3 year historical average of 1.22x, while above its current trading of 1.08x. We accordingly assign an Overweight recommendation given that the current P/E (x) 7.1x 6.4x 5.6x 4.9x price is at a discount of more than 10% of our fair value estimate.

Contacts Disclaimer

Head of Research: Nadim Kabbara, CFA This document has been issued by FFA for informational purposes only. This document is not an offer [email protected] +961 1 985 195 or a solicitation to buy or sell the securities mentioned. Although FFA Private Bank s.a.l. makes reasonable efforts to provide accurate information and projections, certain statements in this document constitute forward-looking Analyst: Raya Freyha statements or statements which may be deemed or construed to be forward-looking statements. These forward-looking [email protected] +961 1 985 195 statements involve, and are subject to known and unknown risks, uncertainties and other 1factors which could cause Sales and Trading, FFA Private Bank (Beirut) the actual results, performance (financial or operating) or achievements to differ from the future results, +961 1 985225 performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Sales and Trading, FFA Dubai ltd (DIFC) Therefore, FFA Private Bank makes no guarantee or warranty to the accuracy and thoroughness of the information + 971 4 3230300 mentioned, and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information presented in this document. All opinions expressed herein are subject to change without prior notice.

TABLE OF CONTENTS

INVESTMENT OPINION ...... 3

COMPANY OVERVIEW ...... 5

Brief background ...... 5 Ownership structure...... 6 Corporate structure ...... 7

GROWTH STRATEGY...... 8 Geographic expansion ...... 8 Business lines ...... 11

RECENT DEVELOPMENTS...... 14 Relevant news in 2010...... 14 Financial performance ...... 14

SWOT ANALYSIS...... 17

FINANCIAL HIGHLIGHTS AND REVISED FORECASTS ...... 18 Balance sheet snapshots ...... 18 Income statement snapshots ...... 24

REVISED VALUATION...... 29

KEY INVESTMENT RISKS ...... 30

FINANCIAL STATEMENTS...... 31 Balance sheet ...... 31 Income statement...... 32

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INVESTMENT OPINION

We like Blom Bank’s high returns and improving risk profile and view the valuation of its shares as attractive

We recognize Blom Bank’ solid positioning in its domestic market and improving risk profile stemming from its efforts at better earnings diversification across products and markets. We like the firm’s superior profitability and return ratios in Lebanon relative to its domestic peers, with estimated domestic net interest margins and ROAs at ~2.33% and ~1.7%, respectively despite sizeable liquidity buffers. We notice improving credit quality and cost-efficiency ratios despite a growing asset base, a validation of management's conservative approach and capacity to improve less performing foreign operations.

1. Solid positioning in its domestic market and significant deployment on the regional scene Blom Bank has grown organically to become one of the prominent players in the Lebanese banking sector where it controls the 2nd largest market share in terms of assets, deposits and loans and operates a network of 71 domestic branches (158 branches including foreign operations). Beyond its decades old presence in Europe through its subsidiary Blom Bank France (since the mid-1970s), the past decade saw a significant deployment of the Bank in key Levant countries encompassing Egypt, Jordan and Syria. As of December 2010, international operations included 11 foreign countries, through a network of 87 branches and contributed 26% of the Group’s deposit base while generating 15% of total earnings. Blom Bank is seeking to become a leading regional bank.

2. Conservative approach to growth and prudent risk practices translate into higher profitability along with improving capitalization, liquidity and asset quality levels Driven by a steady organic expansion, a high and improving cost-efficiency level, and a continuous growth in its balance sheet, Blom Bank has (i) grown its net earnings, as seen by an approximate 19% CAGR between 2005 and 2010 to reach USD 331 mn, and (ii) boasted above-average return ratios compared to its domestic peers (with consolidated ROA of 1.54% in 2010). Growth was realized in parallel with improvements in the Bank’s capitalization, liquidity and asset quality levels, a demonstration of management’s conservative approach to growth and the prudent risk practices in place. While Blom Bank remains well capitalized with a capital adequacy ratio (as per Basel II) of 14%, it also has a highly liquid balance sheet as witnessed by a loans-to-deposits (LDR) ratio of 26.5% as of December 2010, buffering the Bank’s expansion plans, its strategy for increased private sector lending, and scope for further dividend increases (most recently approved in 2010). Asset quality is improving judging by a non performing loan (excluding substandard loans) ratio of 2.67% in 2010 from 3.44% at year-end 2009, while asset allocation is diversifying across assets and loan sectors.

3. Blom Bank has scope for further improvement in its earnings mix across markets and fees & commissions contribution to operating income We consider Blom Bank’s growth phase as positive but view potential for more improvements in earnings mix on the following two fronts:

(i) International operations profitability has room to improve from current levels which would translate into a greater contribution to the Group’s earnings. Blom Bank is seeing lower profitability measures in some key Levant markets, driven by lower net interest margins from weaker credit quality, and more cost prohibitive operations. While some yields may not be as interesting as on Lebanese government securities, we see scope for the Bank to improve operations as NPLs continue to decline in some markets, and banking operations benefit from improved scale and leverage from the maturity of branches (which typically take a few years) and the experience curve of its staff. We estimate ROAs for international operations are below 1% levels, in contrast to Lebanese operations in the 1.7%, thereby driving the overall ROA closer to 1.5%.

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(ii) Contribution of non interest income (largely fees and commissions income) to total income. Blom Bank’s fees and commissions income contribution to total income is still low but should gradually increase over time given management’s efforts in this regard. Initiatives include the expansion in lending, the development of wealth management and , the launch of private equity and new investment funds, and the continuous improvement in service levels from new branches and product and service offerings.

4. The current valuation is at a compelling entry point for investors and rate Blom Bank common shares at Overweight While recent political tension in the region and to a lesser extent in Lebanon has possibly given back the gains from Blom Bank shares’ solid run seen over the last three months, increasing over 15% to reach a high of USD 10.45 before falling back to USD 9.14 on the BSE, we believe there is long term upside as geopolitical shocks ultimately abate and as shares converge towards their intrinsic value, as estimated by our fair value estimate of USD 12.00.

Our fair value estimate of USD 12.00 per share is derived using an intrinsic valuation methodology based on a dividend discount model, and corroborated by a residual income method. We discount our dividends attributable to common shareholders at the cost of equity of 14.5%, assume a 3% terminal growth rate, and add the capital in excess of required amounts. We also validate our intrinsic valuation with market multiples, using the firm’s P/E and P/B ratios on a historical and peer comparison basis.

Our fair value estimate of USD 12.00 implies a P/B of 1.24x on our book value per share 2011 estimates, in line with its 3 year historical average of 1.22x while above its current trading of 1.08x. Blom Bank shares trade at a 4.4% dividend yield, using the LBP 600 dividend approved in 2010 (up from previous LBP 550 in 2008). We believe there is scope to increase dividends over time as the firm’s earnings grow while maintaining its payout policy at around 30%.

We assign an Overweight recommendation given that the current price of USD 9.14 is at a discount of more than 10% of our fair value estimate of USD 12.00.

We believe investors should take the stock market pull back on regional and domestic political uncertainty as a buying opportunity to participate in this steady and long term growth story.

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COMPANY OVERVIEW

Brief background

Blom Bank was founded in 1951 in Lebanon where it has grown organically to become a prominent player in its domestic market. Following a strategy of diversification by business lines and market presence, the Bank currently provides a large spectrum of banking services ranging from retail and corporate banking to investment and private banking as well as brokerage, asset management, Islamic banking and insurance services. Blom Bank’s geographic coverage outside its domestic market spans 11 foreign countries across Europe and the Middle East including France, Switzerland, Romania, UK, Cyprus, Egypt, Syria, Jordan, KSA, Qatar and UAE. As at end-December 2009, Blom Bank operated a network of 59 domestic and 67 foreign branches, further raised to 71 domestic branches and 87 foreign branches as at end-December 2010.

Following Blom Bank’s solid growth in 2009, which benefited from the buoyant Lebanese economy and a banking sector that weathered the global financial crisis and emerged in a stronger shape, Blom Bank’s 2010 results highlight a healthy yet more moderate growth in banking activity as compared to previous years. The Bank saw its major indicators progressing forward as demonstrated by assets, deposits, loans, and net income, registering a growth of 8%, 9%, 29%, and 13%, respectively, realized in parallel with an improvement in asset quality, capitalization, and liquidity levels. At these levels, Blom Bank held an asset base, a deposit base, and a loan portfolio of USD 22,336 mn, USD 19,553 mn, USD 5,180 mn respectively at the end of 2010 and generated USD 331 mn in net profits for the year; with a contribution of 26% and 15% from international operations to the Group’s deposits and earnings, respectively.

The Group’s rankings for 2010 highlight Blom Bank’s position as the 2nd most profitable bank in Lebanon by net income and as the 2nd largest bank in the country by assets, deposits, loans, and shareholders’ equity. On a regional scale, Blom Bank ranked 27th by assets among Arab in 2009. Blom Bank received several awards from internationally renowned institutions, a testament in our view to the Bank’s leadership in profitability levels and conservative risk practices.

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Ownership structure

As of December 31, 2010 and adjusting for the 10 for 1 stock split which occurred on October 5, 2010 that included the Bank’s common shares, as well as the GDRs (Global Depository Receipts), the Bank’s shares consist of the following:

Common shares

The common shares consist of 215,000,000 common shares listed on the Beirut Stock Exchange, as well as the GDRs listed on the Beirut Stock Exchange and the Luxembourg Stock Exchange. The public float is estimated at 55%, when combining the GDRs (34.37%) and public shareholders (20.47%).

Preferred shares

The preferred shares consist of (i) 750,000 preferred shares which were issued in 2004; and (ii) 1,000,000 preferred shares which were issued in 2005. Both classes of preferred shares are listed solely on the BSE.

The figure below depicts Blom Bank’s shareholding structure as of December 31, 2010.

Figure 1: Blom Bank’s shareholding structure as of December 31, 2010

20.47%

34.37%

1.83% 1.97% 1.91% 2.86% 3.61%

5.00%

13.26% 5.39% 9.33%

Bank of New York Melon * Banorabe S.A., SPF** AZA Holding*** Chaker Family Nada Oueini Jaroudi Family Azhari family Saade Family Khoury Family Actionnaires Unis*** Others

Note:

(*) Bank of New York Mellon (as depositary bank) acts as a custodian for all the Blom GDR holders.

(**) The major shareholders of Banorabe are the same as in Blom Bank S.A.L (except Bank of New York and AZA Holding)

(***) Azhari family owns over 50% of these companies

Source: Blom Bank

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Corporate structure

The below figure depicts the major subsidiaries of Blom Bank Group:

Figure 2: Blom Bank corporate structure

Blom Bank Blom Bank France 99.99% 100% (Switzerland) Head office: Paris Head office: Geneva Branches: London – Dubai – Sharjah – Jabal Ali – Romania

Bank of Syria and Overseas S.A. 39.00% Head office: Damascus 52% Syria & Overseas for

99.88% Head office: Damascus Blominvest Bank S.A.L 23.5% Head office: Beirut

BLOM BANK S.A.L 33.33% Blom Development Bank S.A.L - Head Office: Beirut Head office: Beirut - Cyprus 51% - Damascus Free Zone 10% - Jordan Blominvest Saudi Arabia - Abu Dhabi Head office: Riyadh (representative office)

99% Blom Bank Qatar LLC Head office: Doha

99.42% 49% Blom Bank Egypt S.A.A * Blom Egypt Head office: Cairo Securities * Head office: Cairo 88.93% Arope Insurance S.A.L * Head office: Beirut

Arope Syria 10% (Syria International Insurance)

Head office: Damascus

Note: * Blom Bank Egypt S.A.A, Arope Insurance S.A.L and Blom Egypt Securities together own 100% of Arope Egypt Insurance and Arope Egypt Life Insurance

Source: Blom Bank

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GROWTH STRATEGY

Blom Bank’s strategy consists of organically growing and diversifying its income both by business line and by geographic market, seeking to become a leading regional bank. While the Bank currently offers an array of banking services ranging from traditional banking to investment and private banking in Lebanon and is also present in 11 foreign countries, a balanced breakdown of income between Lebanon and abroad as well as between net interest income and non-interest income is a medium-term objective for Blom Bank.

Geographic expansion

Presence in Europe since the mid 1970s through subsidiary banks in France and Switzerland Since the mid-1970s, Blom Bank has developed footprints in Europe to capitalize on the success of its domestic business model and to promote synergies with the regional network, including servicing and cross selling to Lebanese and Arab expatriates living in Europe. The European operations of Blom Bank are predominately conducted through its subsidiary banks namely Blom Bank France and Blom Bank Switzerland and their branches in Paris, London, Geneva, and Romania. The Bank is also present in Cyprus where it operates a branch out of Blom Bank Lebanon. The following table highlights Blom Bank’s European operations.

Table 1: Highlights of Blom Bank’s European operations

Contribution to Launch Branches/Services Action plan and medium- Countries Subsidiary consolidated date provided term targets figures in 2010 1 branch

England Blom Bank France 1983 Corporate banking and trade finance Head office in Paris 6.5% contribution to total deposits 1 branch Blom Bank France France 1976

Corporate banking and trade finance Continue to serve Lebanese 5 branches 9.6% contribution expatriates across Europe to lending activity Romania Blom Bank France 2005 Corporate banking and

trade finance

Head office in Geneva Blom Bank Switzerland 1979 Switzerland 1 branch 3.9% contribution to net income Private banking 1 branch

Cyprus Blom Bank S.A.L 1993 Corporate banking and trade finance

Note: * These figures include assets and profits of UAE branch Source: Blom Bank

Robust branch deployment in the region starting in 2004 Starting in 2004, Blom Bank stepped up its expansion efforts in neighboring countries namely Syria (2004), Jordan (2004) and Egypt (2005, through the acquisition of Misr Romanian Bank); in an effort to further diversify assets and revenue streams as well as to mitigate domestic risk and to address the relative saturation of the Lebanese market. While Blom Bank offers comprehensive retail and commercial banking services in these three key Levant markets, it also provides specialized banking services in the Gulf and more recently in Qatar and KSA for commercial & private banking activities, and for investment banking activities, respectively. It should be noted that Blom Bank is also active in the UAE for commercial and trade finance activities through 3 branches: in Dubai and Sharjah since 1975 and 1978 and in Abu Dhabi where the Group

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established a representative office in 2008. Over the last decade, Blom Bank became the Lebanese bank with the widest international reach counting 87 branches abroad and 71 branches in Lebanon. The table below highlights Blom Bank’s MENA operations.

Table 2: Highlights of Blom Bank’s regional operations

Contribution to Launch Branches / Services Action plan and Countries Subsidiary consolidated date provided medium-term targets figures in 2010 24 branches 9.4% contribution Bank of Syria & Overseas Continue to expand its 2004 Corporate banking, to total deposits branch network to and reach 40 branches in a trade finance 12.6% contribution Syria 3 year horizon Syria and Overseas for to lending activity 2009 Brokerage financial services Provide a full array of 5.7% contribution Arope Syria 4 branches banking services (Syria International 2006 to net income Insurance) Insurance services 25 branches

Blom Bank Egypt S.A.A 2005 Corporate banking, 5.4% contribution retail banking and Continue to expand its to total deposits trade finance branch network to

reach 40 branches in a Blom Egypt Securities 2005 8.5% contribution Egypt Brokerage 3 year horizon to lending activity

5 branches Arope Egypt Insurance 2009 Provide a full array of 2% contribution to Insurance services banking services net income 5 branches Arope Egypt Life 2009 Insurance Insurance services 2.7% contribution to total deposits Continue to expand its 7 branches branch network to Blom Bank Sal 5.6% contribution reach 10 branches Jordan 2004 (Jordan branches) Corporate banking, to lending activity retail banking and Provide a full array of trade finance 2.9% contribution banking services to net income 1.8% contribution 1 branch in Dubai Blom Bank France to total deposits 1 branch in Sharjah (Dubai and Sharjah 1975 1 representative UAE branches) 4.4% contribution office in Abu Dhabi Blom bank sal to lending activity 2008 (Abu Dhabi representative Commercial banking office) 2.3% contribution and trade finance to net income Seek to offer corporate finance, asset management & investment services such as brokerage, Saudi Blominvest Saudi Arabia 2010 1 branch -1.1% contribution wealth management, in Arabia to net income addition to private Investment banking equity activities Plans for a real estate fund 0.1% contribution to total deposits Aim to develop 1 branch corporate banking,

0.5% contribution investment&private Qatar Blom Bank Qatar L.L.C 2009 Commercial and to lending activity banking and asset private banking management activities

-0.6% contribution to net income Source: Blom Bank

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Recent launch of specialized banking operations in Qatar and KSA In 2009, Blom Bank launched its operations in Qatar offering corporate banking, trade finance, and private banking and aims to develop investment banking and asset management. In the Kingdom of Saudi Arabia, Blom Bank launched operations in early 2010 and seeks to expand beyond investment banking by offering brokerage, wealth and asset management including a private equity focus and the launch of a real estate fund. While Blom Bank has a share in the market in Qatar with room to grow and KSA has banking mandates in the pipeline, we note the minor negative contribution from these two entities to the Group’s earnings in 2009 and into 2010 as they seek to grow beyond their early stage, despite facing some tough competition.

Despite a lower contribution from foreign operations to the Group’s consolidated earnings On a consolidated basis at end 2010, Blom Bank managed a global deposit base of USD 19,553 mn, in which foreign deposits represented 26% of the total, accounted by the Bank’s foreign branch network as well as its large deposit base in Sub-Saharan Africa and Latin America where it has no physical presence. The breakdown of earnings between Lebanon and abroad was 80% and 20% in 2009, respectively as compared to 87% and 13% in 2005, indicating the rising contribution of foreign operations to the Group’s consolidated earnings resulting from its active deployment in regional countries. However, the share of foreign earnings to the Group’s total earnings declined to 15% in 2010, which we attribute to the: (i) rise in profitability of Lebanese operations, (ii) higher cost base in Levant markets as branches have yet to reach full potential, (iii) recent start up of KSA and Qatari offices, and (iv) global economic slowdown and credit crisis unfavorably impacting European operations.

The following pie charts depict the geographic breakdown of the Group’s assets and earnings.

Figure 3: Geographic breakdown of assets Figure 4: Geographic breakdown of earnings 100% 100% 80.4% 82.1% 69.9% 70.6% 73.6% 80% 80% 71.2% 60% 60% 21.0% 19.7% 40% 21.0% 40% 19.8% 13.9% 13.7% 9.1% 8.4% 20% 6.7% 20% 9.0% 5.7% 4.3% 0% 0% 2008 2009 Sep-10 2008 2009 Sep-10

Lebanon MENA Europe Lebanon MENA Europe

Source: Blom Bank Source: Blom Bank

With a target to reach a balanced breakdown of earnings between Lebanon and abroad Blom Bank targets a balanced contribution between domestic and international operations to the Group’s assets and earnings by 2015 and by 2020 respectively. In this regard, the Bank aims at further strengthening its presence abroad by:

 Looking for organic expansion opportunities in new countries offering high growth potential while operating in a stable environment, potentially in the GCC region,  Aggressively expanding its branch network in Syria and Egypt and to a lesser extent in Jordan, and  Seeking to increase market share by expanding services and targeting underdeveloped loan sectors including housing loans outside Lebanon and loan syndication deals.

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Business lines

A universal banking model with a wide range of banking services Together with its subsidiaries, the Group currently provides a comprehensive range of banking services (retail, commercial and corporate, private and investment) as well as Islamic banking and insurance. The table below summarizes the highlights of Blom Bank’s business segments:

Table 3: Overview of Blom Bank’s major business lines

Facts and key figures  Treasury and liquidity management from money market operations (bank placements, CDs, T-bills, gov’t bonds), brokerage in financial instruments Treasury,  Nearly 1/3 of total equities turnover on the BSE (or USD 616 mn) by Q4-10 money, and  Supported by two securities subsidiaries in Syria and Egypt capital  53.7% contribution from treasury, money and capital markets to total operating markets income for 9M-10

Strategic orientation  Redirect excess liquidity to highly rated securities away from Lebanese sovereigns  Develop brokerage activity in the region

Facts and key figures  Services corporate and institutional accounts by receiving deposits and providing credit facilities including loans, project finance, syndicated loans  24.8% contribution from corporate banking to total operating income for 9M-10 Corporate banking Strategic orientation  Develop business with corporate and SMEs with focus on tourism, industrial, and commercial sectors  Potential for more growth in the commercial banking segment with the launch of the Qatari entity and the market recovery in UAE

Facts and key figures  Services individuals by taking deposits and provides loans, credit cards, and funds management through 71 domestic branches and 87 foreign branches (as of December 31, 2010)  Counts over 115 retail products Retail  84% of retail loans allocated to car loans and housing loans in 2010 banking  16.7% contribution of retail banking to total operating income for 9M-10

Strategic orientation  Branch network rollout in key Levant markets  Room to grow further in Lebanon with recent addition of new branches  Develop housing loans segment outside Lebanon

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Facts and key figures Private  Two platforms for private banking: Lebanon and Switzerland banking  Non-discretionary AUM at USD 5,402 mn in 2010  Mutual funds amounted to USD 350 mn in 2010  Through Blominvest Bank (Beirut) and recently established Blominvest KSA  Lead-managed sovereign issues for a total USD 4.2 bn  Participated in a number of M&A private deals for a total of USD 500 mn Asset management  1.8% contribution to total operating income for 9M-10

Strategic orientation  Expand coverage of asset management products to private clients  Expand underwriting activities including loan syndication programs Investment  Focus on private equity and investment management with a plan to launch a banking real estate fund in KSA  Focus on real estate transactions including advisory, placement & development  Potential participation in the wave of privatizations that may occur in Lebanon

Revenues originate predominately from liquidity as revenue diversification lags banking peers Blom Bank has been focusing its strategy of diversifying business activities towards a universal banking model. The breakdown of operating income for 9M-2010 illustrates a contribution of 24.8% and 16.7% for corporate banking and retail banking respectively while asset management and private banking together accounted for 1.8%. Treasury, money and capital markets accounted for the bulk of operating income with 53.7%, given the Bank’s significant liquidity in cash, CB reserves, CDs, and bank placements (as measured by a high liquid assets to deposits ratio and a low loans-to-deposits ratio at 67.1% and 26.5%, respectively in 2010).

Total operating income (before provisions) amounted to USD 680mn and USD 567 mn in 2010 and 2009, respectively, up from 527 mn in 2008. The charts below highlight its breakdown between net interest income and non-interest income as well as by business line.

Figure 5: Net interest income vs. non-interest income Figure 6: Operating income by business line (Sep-10)

* USD 527 mn * USD 567 mn * USD 680 mn 1.8% 2.9% 16.7%

100% 80%

53.7% 60% 77.8% 73.9% 72.8%

40% 24.8% 20% 22.2% 26.1% 27.2% 0% Treasury, money & capital markets Corporate banking 2008 2009 2010 Retail banking

Non-interest income Net interest income Asset management & private banking Unallocated

Note: * Total operating income, which excludes credit losses Source: Blom Bank Source: Blom Bank

Blom Bank’s share of non-interest income to total operating income is increasing as highlighted by the ratio standing at 27.2% in 2010 (as compared to 26.1% in 2009 and 22.2% in 2008). However, this contribution remains below Lebanese banking peers (largest banks “Alpha” at 35% for 2010), highlighting the Bank’s traditional role as an intermediary between depositors and borrowers. The Bank is currently addressing this by intensifying efforts aimed at better revenue diversification across business lines, seeking to increase fees and

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commissions income which represent about 15% of total operating income and in need of further development in our view.

The medium-term target of Blom bank is to reach a balanced breakdown of revenues between net interest income and non-interest income through the enhancement of its fees and commissions. Some initiatives that are taking place to meet this balanced target are highlighted below:

 Continue to expand its loan book across all business lines, particularly in under represented sectors including commercial and SMEs in corporate, and housing & car loans in retail outside Lebanon,  The development of its private and investment banking activities by reinforcing teams in its markets,  The launch of private equity and new investment funds including a real estate fund in KSA and new additions to the mutual fund line-up in Lebanon, and  Realizing cross selling opportunities with the aim of increasing commissions.

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RECENT DEVELOPMENTS

Relevant news in 2010

April 2010: Blom Bank’s ratings improve following Moody’s upgrade on the Lebanese Sovereign Moody’s Investors Service upgraded four Lebanese banks’ long-term foreign currency deposit ratings including Blom Bank to B1 from B2. The upgrades follow similar actions taken on Lebanon’s sovereign ratings (Moody’s: to B1 from B2) which continue to act as a ceiling on the component banks’ ratings, given their significant exposure to the public sector debt.

April 2010: Increased dividend payout approved in April 2010 for the 2009 financial year Shareholders approved the board’s proposal for a dividend payout increase to LBP 600 or USD 0.40 per share (after adjusting for the stock-split) for holders of the Bank’s common shares and global depositary receipts. Shareholders also approved the payment of USD 8.50 per share to holders of preferred shares of the 2004 series and USD 9.50 per share to holders of preferred shares of the 2005 series.

June 2010: Launch of Blom Pyramids Balanced Fund Blom Bank launched “Blom Pyramids Balanced Fund” with the objective of investing in the Egyptian market with a targeted allocation of minimum 50% in Egyptian debt instruments and a maximum of 50% in equities. Subscription and redemption are conducted on a weekly basis with a starting unit price of USD 5,000. Blom Bank followed with the launch of the Blom Money Market Fund in September 2010.

October 2010: Stock split at a ratio of 10 to 1, with aim to improve liquidity and traded volume The recent stock split of Blom Bank’s outstanding share capital became effective as of October 4th 2010. The stock split included the Bank’s common shares as well as the GDRs representing common shares; in each case at a ratio of 10 to 1. The trade on a post-split basis started on October 5th 2010. The stock split aims to improve the liquidity and the traded volume of Blom Bank shares from increased shares outstanding and more attractive pricing to retail investors.

Financial performance

January 2011: Q4 2010 results

Balance sheet

In line with its banking peers on the domestic market, Blom Bank’s deposit inflows moderated in 2010 as compared to the past few years as a direct result of (i) a normalization effect after the Lebanese banking sector benefited from record inflows of deposits following the inception of the global financial crisis in 2008, and (ii) the reduction in the interest rates of USD and LBP deposits. In this context, Blom Bank’s deposit base grew by 9% in 2010 to reach USD 19,553 mn at the end of 2010. With deposits continuing to account for the lion’s share of the Bank’s asset base (around 88% in 2010), the latter grew by 8% to reach USD 22,336 mn by the end of 2010 reflecting a similar growth rate to the one of deposits.

Blom Bank saw its loan book growing at a strong 29% rate in 2010 in light of the buoyant economic conditions that prevailed in Lebanon, the Bank’s ample levels of liquidity, the Bank’s expansion in regional countries as well as by the Bank’s effort for a more diversified asset mix (namely a lower dependency on the Lebanese sovereign). At year-end 2010, the loan portfolio amounted to USD 5,180 mn and loans-to-deposits ratio reached 26.5% up from 22.4% at year-end 2009 as loans grew at a much higher pace than deposits. This loan growth was realized without any detriment to the Bank’s credit quality as highlighted by a gross NPL to gross loans ratio of 3.4% in 2010 and a coverage ratio (excluding collective provisions) of 82.5%.The Bank’s equity-to assets ratio reached 8.4% in 2010 slightly higher than 8.2% in 2009.

The capital adequacy ratio (CAR) as per Basel II was 14% in 2010, which remained practically unchanged from its level in 2009 (13.96%) Profitability ratios stood at 1.54% and 18.3% in 2010 for return on average assets (ROAA) and return on average equity (ROAE) respectively as compared to a respective 1.52% and

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18.5% in 2009. In this regard, it is worth mentioning that Blom Bank has traditionally boasted high capitalization and profitability levels compared to the sector as a result of its gradual organic expansion, conservative practices, and competitive cost-efficiency levels.

Table 4: Blom Bank’s Q4-2010 summary balance sheet

USD millions Q4 09a Q3 10a Q4 10a qoq % yoy%

Cash and balances with central banks 3,114 2,882 2,818 -2% -9% Financial assets 9,177 9,995 9,821 -2% 7% Due from banks and financial institutions 3,839 3,728 3,936 6% 3% Loans and advances 4,019 4,873 5,180 6% 29% Other assets 555 574 581 1% 5% Total assets 20,702 22,053 22,336 1% 8% Due to banks and financial institutions 468 321 251 -22% -46% Deposits 17,970 19,224 19,553 2% 9% Other liabilities 556 640 629 -2% 13% Shareholders' equity 1,708 1,867 1,903 2% 11% Total liabilities and shareholders' equity 20,702 22,053 22,336 1% 8%

Source: Blom Bank

Income statement

Driven by a 20% increase in its income from operations (namely an 18% growth in net interest income and a 25% growth in non-interest income), Blom Bank saw its net profits and earnings per share (EPS) increasing by 13% in 2010 as compared to 2009. This lower level of growth in the bottom line relative to the top line can be attributed to credit loss expense of USD -18 mn in 2010 vs. credit income and impairment gains of USD + 13 mn in 2009. Profitability was favored by a reduction in the Bank’s cost-to-income ratio from 40.7% in 2009 to 38.3% in 2010 which suggests that Blom Bank has further improved its cost-efficiency levels on the back of a strict cost-control policy. On the back of higher interest margins, Blom Bank’s net interest income totaled USD 495 mn for the full year 2010 as compared to USD 419 mn for the full year 2009 which represents an 18% yoy increase.

After their contraction in 2009 (from 2.42% to 2.18%) interest margins widened in 2010 to reach 2.29%, stemming from the Bank’s reduction in its cost of funds in view of preserving margins and profitability in the context of a low interest rate environment. Blom Bank’s net interest income accounts for the bulk of total operating income as witnessed by a ratio of 73% in 2010, relatively stable from 74% in 2009.

After having remained practically unchanged in 2009, Blom Bank’s income from fees and commissions registered a 21% increase in 2010 totaling USD 97 mn, thus sustaining its share in total operating income at 14%. Despite this modest contribution, we believe it will increase in the coming years on the back of a dynamic lending activity as well as by management’s current focus on generating fees and commissions income through asset management and private equity initiatives.

Blom Bank’s total income from operations amounted to USD 680 mn in 2010, representing a 20% yoy increase. However it should be noted that net operating income growth (at 14% in 2010) was slowed by credit losses registered in 2010 (USD - 18 mn) against credit income and impairment gains in 2009. Consequently net operating income amounted to USD 662 mn in 2010.

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Table 5: Blom Bank’s Q4-2010 summary income statement

USD millions Q4 10a Q4 09a yoy% 2010a 2009a yoy% Net interest income 132 109 21% 495 419 18% Net fees and commissions income 26 22 18% 97 81 21% Trading and investment income 39 26 48% 76 54 40% Other operating income 5 6 -12% 11 12 -14% Non-interest income 70 54 29% 185 148 25% Total operating income 202 163 24% 680 567 20% Operating expenses (63) (51) 23% (236) (207) 14% Depreciation and amortization (6) (6) 6% (25) (23) 7% Credit loss expense (16) (9) 73% (18) 3 -615% Impairment losses on financial investments, net 0 10 -100% 0 10 -100% Profit before tax 117 107 9% 401 350 15% Income tax (22) (19) 17% (71) (57) 24% Net profit 95 88 7% 331 293 13% Basic EPS (in USD) 1.46 1.29 13% Diluted EPS (in USD) 1.46 1.29 13%

Source: Blom Bank

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SWOT ANALYSIS

Strengths - Ranks 2nd in Lebanon in terms of deposits, loans and assets - High level of profitability compared to domestic peers driven by an organic growth strategy, a conservative business model and strict cost-control policy - Comfortable capitalization as measured by a capital adequacy ratio of 14% in 2010 - Ample liquidity with a loans-to-deposits ratio at 26.5% in 2010

Weaknesses - Relatively underdeveloped level of revenue diversification compared to banking peers (in terms of fees and commissions contribution to total operating income) - International operations profitability measures well below its domestic operations as some markets are a drag on the Group’s earnings

Opportunities - Roll out and ramp up of branch networks in key Egypt, Syria, and Jordan markets - Enhancement of private and investment banking activities with the launch of operations in Qatar and Saudi Arabia - Well positioned to capture regional growth in a context of gradual recovery of regional economies - Room to increase lending activity from current levels particularly in corporate and SMEs sectors

Threats - Deterioration of the political and security situation in Lebanon and in the region - Significant exposure to Lebanese sovereign assets - Potential pressure on asset quality should economic conditions deteriorate amid a growing retail loan book

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FINANCIAL HIGHLIGHTS AND REVISED FORECASTS

Balance sheet snapshots Balance sheet growth in 2010 reverts back to more moderate 2008 levels following strong 2009 Blom Bank’s balance sheet growth moderated in 2010 as witnessed by a 7.9% yoy increase in its asset base, in line with the 7.6% growth rate achieved in 2008 but half the15.7% level in 2009. The solid balance sheet growth realized in 2009 was driven by a significant 18.9% uptake in deposits and was mainly the result of record capital inflows following increased confidence in political/security situation, the perceived safe haven status of its banking system, and relatively attractive rates on deposits.

F ig.7: Breakdown of liabilities and Fig. 8: Geographic breakdown Fig. 9: Currency breakdown shareholders’ equity (Dec-2010) of deposits (Dec-2010) of deposits (Sep-2010)

3.9%

8.5% 19.4% 31.0%

6.5%

69.0% 87.5% 74.1% Private customers' deposits

Shareholders' equity Lebanon Europe FC deposits Other liabilities LBP deposits MENA

Source: Blom Bank Source: Blom Bank Source: Blom Bank

Lebanese operations and FC denominated deposits continue to account for the lion’s share of the Bank’s deposit base In Q4-2010, the structure of Blom Bank’s deposit base revealed that Lebanese operations contributed 74.1%, while deposits from MENA and European operations accounted for 19.4% and 6.5% of the Group’s deposits respectively (c.f: figure 8). In-line with the typical deposit structure of a Lebanese bank, the currency breakdown highlights a mismatch between foreign currency deposits (mainly those denominated in USD) and LBP deposits, with FC deposits accounting for 69% of the Bank’s deposit base in Q3-2010 (c.f: figure 9). However it should be noted that Blom bank carries significant liquidity in foreign currency to meet potential deposit conversions and/or withdrawals. Additionally dollarization of deposits is declining in the Lebanese banking sector and Blom Bank has been increasing its share of LBP deposits (15.9% in 2007, 29.1% in 2009 and 31% in Q3-2010) given the preferential interest rate differentials for depositors in the context of an increased confidence in the Lebanese pound and the Lebanese economy as a whole.

Deceleration in assets and deposits growth in 2010 and expectation of moderate yet healthy growth over 2010e-2014e Since the beginning of 2010, Blom Bank has seen a deceleration in assets and deposits growth, in-line with the behavior of the Lebanese banking sector. Blom Bank’s 2010 financial results indicate that both assets and deposits grew at roughly the same pace, registering a respective 8% and 9% ytd growth (as compared to 13% and 16% respectively in 2009) with deposits accounting for nearly 88% of the Bank’s assets (c.f: figure 7) in 2010. At these growth levels, Blom Bank’s total assets and deposits increased to USD 22,336 mn and USD 19,553 mn by the end 2010, respectively, thus reaffirming the Bank’s status as the 2nd largest Lebanese bank based on these two criteria. This deceleration can be mainly attributed to:

 The record inflows of deposits in Lebanese banks since 2007, fueled by both resident and nonresident deposits (with non-resident deposits growing over 40% in 2009 alone as compared to 11.5% in 2010), which are now normalizing to more normal levels, and

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 Blom Bank as well as banking peers in Lebanon have been lowering interest rates on both USD and LBP deposits in view of alleviating pressures on interest margins, seeking to preserve profitability levels from low international benchmark rates.

Looking ahead, we expect Blom Bank’s asset base to remain largely funded by deposits which will continue to be the main driver of asset growth. We anticipate assets and deposits to grow at a moderate yet healthy CAGR of 11% over 2010a-2014e, reaching USD 33,860 mn and USD 29,360 mn respectively in 2014e.

While the Lebanese market is concentrated among the top three banks (c.f: figure 11), we anticipate Blom Bank will be well-positioned to grab additional growth potential on an encouraging macro outlook given its leadership position and growing branch coverage network (management plans 6-7 new branches in 2011, 1-2 per year afterwards). Furthermore, interest rates on deposits are not expected to further decrease, which would provide further support for deposits’ growth in the coming periods. Domestically, we anticipate high single digit growth in assets and deposits over the 2010a-2014e forecasted period.

Internationally, operations in Levant countries (Egypt, Syria, and Jordan) where the Bank provides full banking services will remain a key driver for growth. Blom Bank is establishing a significant presence in Syria and Egypt, with a network of 40 branches within a 3-year horizon (as compared to 24 branches in Syria and 25 branches in Egypt currently), seeking to exploit the double digit growth rates in assets, deposits, and loans in Syria, as well as the large population and relatively under banked activity in Egypt.

Table 6: Banking indicators in key countries of operation (end of 2009)

Commercial Assets Loans Deposits Population GDP banks’ Assets / GDP / GDP / GDP (mn) (USD mn) (USD mn) % % % Syria 20.1 52,635 43,655 83% 21% 51% Egypt 76.7 187,954 200,381 107% 42% 80% Jordan 5.9 25,113 45,427 181% 75% 115% Lebanon 3.9 34,528 115,250 334% 70% 294%

Note: Interest spread represents the difference in rates between loans and deposits for same maturity of less than 1 year Source: Central banks, IMF, OANDA, FFA Private Bank

Figure 10: Deposits Figure 11: Market share in deposits (end of 2009)

40,000 20% 13.7% 23.4%

30,000 15% 20,000 10% USD mnUSD 10,000 5% 34.0% 18.3% 0 0% 2008 2009 2010 2011e 2012e 2013e 2014e 10.6% Deposits (lhs) % Growth (rhs) Sal Blom Bank Sal Sal Other Alpha banks(*) Beta, Gamma and Delta banks (**)

Note: * Banks with deposits over USD 2 billion ** Banks with deposits below USD 2 billion Source: Blom Bank and FFA Private Bank estimates Source: Bilanbanques 2010

In the Levant countries, we anticipate growth in assets and deposits to grow at a low double digit growth rate over the 2009a-2014e forecasted period.

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On a consolidated basis, we expect deposits to gradually accelerate to 11% in 2014e from 9% in 2010, as international operations contribute a larger share to total operations from the roll out of the network and ramp up of existing branches benefiting from improved operating leverage and productivity levels.

Blom Bank’s sound capitalization to help buffer against higher operating and potential geopolitical risks in Lebanon Blom Bank’s average equity-to-assets ratio improved slightly to 8.4% in 2010 from 8.2% in 2009, which we view as satisfactory and roughly in-line with the domestic banking sector at 8.8%1.

Blom Bank held a Capital Adequacy Ratio (CAR as per Basel II) of 14% in 2010, which was in line with the 13.96% achieved in 2009 and higher than the sector average at 12.9% in 20092. We believe the CAR at well above the 8.00% required level would help act as a buffer from political/security shocks unfavorably impacting: (i) the Bank’s substantial holdings in AFS securities (at about USD 2.7 bn in Q4-2010), and (ii) higher loan delinquencies from a slowing economy. The Tier I capital ratio (as per Basel II) was 12.54% in Q3-2010. Management sees no impact from the introduction of Basel III on its capitalization levels.

Looking ahead, we expect the Bank to continue to improve capital levels, with equity to assets reaching 9.3% in 2014e. Given Blom Bank’s conservative strategy based on organic growth, we do not foresee any significant capital issues required over the coming years needed to finance its expansion plans.

1 Bilanbanques 2010 2 Bilanbanques 2010 20

Blom Bank’s asset allocation reflects a significant exposure to the sovereign at the expense of its loan book At Q4-2010, Blom Bank’s asset allocation reflects a 23.2% exposure to private sector lending, a 30.4% exposure to cash and central bank, a 17.9% to banks placements as well as a 25.9% allocation to securities. In-line with a typical balance sheet structure of a Lebanese bank, Blom Bank’s asset allocation reflects an important exposure to Lebanese sovereign securities. We estimate the overall exposure to the Lebanese sovereign, including Central Bank’s CDs, T-Bills and reserves at the Central Bank stands in the mid 40% range of the Bank’s total assets. Figure 12: Asset allocation Figure 13: Geographic Figure 14: Currency breakdown of ( Dec-2010) breakdown of loans (Dec-2010) loans (Sep-2010)

2.6% 12.5%

25.9% 30.4% 31.6%

58.8%

17.9% 23.2% 9.6% 87.5% Cash & Central Bank Loans Interbank Securities Lebanon * Europe MENA LBP loans FC loans Other assets

Source: Blom Bank Source: Blom Bank Source: Blom Bank

Lending growth intensifies to 28.9% in 2010 after a 15.7% progression in 2009 In light of the buoyant economic conditions in Lebanon with real GDP rates of 9% in 20093 and 8% in 20104, the accommodating measures from the Central Bank via the easing of required reserves, and Blom Bank’s ample levels of liquidity to support domestic demand, consolidated lending activity was strong with growth of 28.9% to reach USD 5,180 mn at the end of December 2010. Blom Bank saw across the board domestic growth in lending, particularly in the retail housing market and in local currency denominations, while benefited from solid contributions from Syria and Egypt entities, and continued to grow its syndication loan business.

We expect Blom Bank to record a lending growth in the 15%-16% range from 2011e onwards From 2011e onwards, we have conservatively assumed that loans growth will moderate yet remain solid. We anticipate an annual growth in the range of 15%-16 %, which should drive the Bank’s total loans and advances to USD 9,246 mn in 2014e.

Figure 15: Loans and advances

12,000 40%

30% 8,000 20% 4,000

mnUSD 10% 0 0% 2008 2009 2010 2011e 2012e 2013e 2014e

Loans and advances (lhs) % Growth (rhs)

Source: Blom Bank and FFA Private Bank estimates

3 Preliminary figures, IMF 4 Preliminary figures. IMF 21

Our overall CAGR (2010a-2014e) for loans growth stands at 15.6%. We back our positive view from the following factors: (i) room for growth in the commercial loans segment as the Lebanese economy expands, ii) additional credits to the non-resident Lebanese clientele, (iii) demand for loans from the Bank’s operations in regional countries like Egypt and Syria, (iv) recent focus on loans syndication, and (v) the Bank’s efforts at controlling its sovereign exposure.

Expected asset allocation shift resulting from higher lending to private sector and reallocation of the portfolio securities towards better rated government and corporate bonds We expect the Bank to witness an improved asset deployment, namely a lower dependency on the Lebanese sovereign and a more geographically aligned asset mix. The drivers behind this asset allocation shift are the anticipated robust lending activity to the private sector which should increase the share of private sector loans in the asset base as well as Blom Bank’s target to stabilize its exposure to the Republic of Lebanon government securities (namely Eurobonds, Ministry of Finance Treasury bills and Lebanese Central Bank’s CDs) by orienting its portfolio securities towards better rated debt securities. We expect Blom Bank will also shy away from increasing its liquidity in foreign currency via placements with non resident banks, unless the geopolitical situation in Lebanon significantly deteriorates.

We remain cautious on the Bank’s significant asset and liability mismatch There is an approximate USD 10 bn mismatch on assets and liabilities on maturities of over one year, with greater than one year asset maturities representing 50% of total assets, while greater than one year liabilities representing less than 3%, explained by the Bank’s shorter term deposit rich funding structure. While we remain cautious on the asset-liability mismatch, our view is tempered by the following reasons: (i) The vast majority of financial assets, including placements with banks, loans and advances, loans and receivables, held to maturity investments, and some available for sale instruments are carried at amortized cost and not subject to repricing risk, (ii) short term and variable nature of some credits including trade finance and private sector loans with periodic reviews, and (iii) the sticky and less transient nature of deposits.

Blom Bank’s asset quality is sound as witnessed by a low level of NPLs matched with high provisioning Regarding asset quality, Blom Bank enjoys a sound and improving asset quality. Despite a 29% growth rate in loans and advances in 2010, the level of non-performing loans (excluding substandard loans) as a percent of gross loans declined to reach 2.67% (vs. 3.44% in 2009 and 3.93% in 2008). Blom Bank’s loan loss reserves coverage stood at 82.5% (excluding collective provisions) in 2010 as compared to 77.7% in 2009 and 79.5% in 2008. When incorporating unallocated provisions, the coverage for 2010 extends to 108.7% and above the 100% minimum level management seeks to maintain over next years. While not modeled into our assumptions, previous provisioning on bad loans and improving credit profile may provide scope for the reduction in provisioning and/or release of built up loan loss reserves thereby favorably impacting income.

Table 7: Asset quality and provisioning

2010 2008 2009 Gross doubtful loans (DLs) / gross loans 3.93% 3.44% 2.67% Loan loss reserves (LLRs) on DLs / DLs 79.51% 77.69% 82.49% Substandard loans (SLs)+DLs / gross loans 4.42% 3.94% 3.40% LLRs on SLs+DLs / SLs+DLs 90.4% 87.7% n/a Source: Blom Bank

Blom Bank’s loan portfolio breakdown by economic sector at end-September 2010 indicates (cf: figure 16) that 11.4% of loans were allocated to construction, while 12% were housing loans. This 23.4% exposure of the loan portfolio to the property market remained practically unchanged from end-2009 (22.5%) Going forward, the exposure of the Bank to the property market should be monitored as it shows signs of a slowdown and any substantial increase in exposure could give rise to concern. However, we believe the risk to be manageable given that it represents an estimated 5% share of total assets (at the end of September 2010), the high collateralized / guaranteed nature of the loan book with secured loans at 85%, as well as the conservative practices of regulatory authorities.

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Figure 16: Loans breakdown by economic sector Figure 17: Loans breakdown by customer type (Sep-2010) (Sep-2010)

8.3% 2.2% 1.9% 1.5% 2.3% 10.5% 4.6%

27.7% 2.9% 16.3% 36.8%

15.4%

2.4%

11.4% 25.9% 29.9%

Agriculture and forestry Manufacturing Securities Syndicated loans Trade retail Trade wholesale Corporate Retail* Serv ices Construction SME 's Real estate Freelance professions Consumer loans Project finance Other

Note: * of which 40.3% exposure to housing loans Source: Blom Bank Source: Blom Bank

Despite the expected strong lending growth and not taking into account any significant risk of deterioration in the country’s economic or political situation, we do not foresee a major threat to Blom Bank’s asset quality given the strong risk management record with declining NPLs despite a growing loan book.

Loans-to-deposits ratio expected to gradually increase to reach 31.5% by 2014e Blom Bank’s loans growth in 2010 (+29%) was notably higher than deposits growth over the same period (+9%), resulting in a loans-to-deposits ratio increasing from 22.4% in 2009 to 26.5% in 2010.

Figure 18: Loans-to-deposits ratio

32,000 35% 32% 24,000 29% 16,000 26%

mnUSD 8,000 23%

0 20%

2008 2009 2010 2011e 2012e 2013e 2014e

Total deposits (lhs) Total loans (lhs) Loans-to-deposits ratio (rhs)

Source: Blom Bank and FFA Private Bank estimates

Given our estimates revolving around a high loans growth against a moderate deposits growth, the loans-to- deposits ratio of Blom Bank is expected to gradually increase to 31.5% in 2014e.

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Income statement snapshots

After stagnation in 2009, the Bank’s net interest income growth accelerated in 2010 and continued to account for the bulk of total operating income The tightening interest spread environment in 2009 weighed on Blom Bank’s net interest income: from USD 410 mn in 2008, the figure rose a paltry 2.2%, to total USD 419 mn in 2009, which can be mainly attributed to a net interest margin (before provisions on doubtful loans) contraction from 2.42% in 2008 to 2.18% in 2009.

This sluggishness in net interest income growth which characterized 2009 was reversed in 2010 as the figure amounted to USD 495 mn in 2010 the equivalent of an 18% growth relative to the previous year, with an improved net interest margin of 2.29% in 2010. This regain of momentum since the beginning of 2010 can be mainly attributed to an improvement in the Bank’s interest spreads with deposit rates bottoming in Q2-2010. In-line with the Lebanese banking sector, Blom Bank has been reducing its interest rates on both USD and LBP deposits to reach 2.87% and 5.74% respectively as at September 30, 2010.

Figure 19: Interest rates on LBP and USD deposits for the sector

8 4

7 3

% 6 2 % 5 1

4 0 Oct-08Dec-08Feb- Apr-09Jun- A O D Feb-10A Jun- A O D ug-0 ct- ec- pr ug- ct ec- 09 0 0 09 -10 10 -1 10 9 9 9 10 0

Weighted average rate on LBP deposits (lhs) Weighted average rate on USD deposits (rhs)

Source: Association des Banques du Liban (ABL)

Taking a close look at the sector as a whole, interest rates on both the Lebanese Pound and the USD declined in 2009 and throughout 2010: The former fell to an average 5.69% in December 2010 from 7.26 % in December 2008, while the latter recorded a fall to 2.80% in December 2010 from 3.45% in December 2008.

We note that deposits with banks and central banks represent nearly 30% of interest earning assets, but less than 10% of interest income, while Lebanese t-bills and other gov’t bills represent over 25% of earning assets and nearly 35% of interest income. We expect the negative carry on primary liquidity with deposits in FC costing approximately 3% while benchmark rates at near zero hurting Blom Bank’s (and the bank sector’s) interest spread and interest income. We estimate that every 100bps impacts the firm’s interest spread and interest income by 30bps and USD 50 mn, respectively.

Table 8: Interest income, earning assets and gross yield components

LBP- USD- % of Total % of Interest based based Gross Weighted (2009, in USD millions) interest earning earning income earning earning yield (b) (a)*(b) income assets assets (a) assets assets Deposits with banks and central banks 107 9.4% 138 4,829 4,967 29.3% 2.1% 0.6% Lebanese t- bills and other gov't bills 391 34.4% 2,209 2,228 4,437 26.1% 8.8% 2.3% Bonds and financial instruments 342 30.1% 838 2,037 3,875 22.8% 8.8% 2.0% Loans and advances 297 26.1% 358 3,331 3,689 21.7% 8.0% 1.7% Total 1,136 100% 3,543 12,425 16,968 100% 6.7% 6.7% Source: Blom Bank, FFA Private Bank estimates

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Looking ahead we expect net interest income to grow at a CAGR of 13% over 2010-2014e Overall, the net interest income is set to grow at a 13% CAGR (2010-2014e) from USD 495 mn in 2010 to USD 802 mn by the end of our forecast period. We back our positive view regarding net interest income momentum on both price volume effects. The price effect should be related to an improvement in the Bank’s interest margins from an eventual pick up in international rates as well as the Bank’s recent focus on a strategy to protect margins by limiting deposit rate cuts and an asset allocation shift towards higher yielding assets away from bank placements and into the private sector. It should also be noted that the Association of Banks in Lebanon set recommendations to its member banks in 2010 to limit deposit rates at 3.25% and 6.25% on USD and LBP deposits, respectively in order to help protect margins. The volume effect should be driven by a healthy progression of the Bank’s earning assets, yet at a slower pace than the past two years.

Figure 20: Earning assets and net interest margin Figure 21: Net interest income

40,000 2.7% 1,000 40% 2.5% 800 30% 30,000 2.3% 600 2.1% 20% USD mnUSD 400 20,000 1.9% mnUSD 10% 1.7% 200 10,000 1.5% 0 0% 2008 2009 2010 2011e 2012e 2013e 2014e 2008 2009 2010 2011e 2012e 2013e 2014e

Earning assets (lhs) Net interest margin (rhs) Net interest income (lhs) % Growth (rhs)

Source: Blom Bank and FFA Private Bank estimates Source: Blom Bank and FFA Private Bank estimates

We expect net interest income to total USD 551 mn for 2011e, equivalent to an 11.2% yoy increase over 2010. Over the rest of the projection period the growth rate should hover in the 13%-14% range.

Blom Bank non-interest income grew 26% in 2009 and 25% in 2010 Blom Bank’s income from non-interest sources totaled USD 148 mn in 2009 reflecting a 26% yoy increase from 2008 which was mainly driven by a sizeable jump in market-related revenues as those from fees and commissions remained almost flat. Financial results in 2010 show that non-interest income totaled USD 185 mn, or the equivalent of a 25% increase relative to the previous year. The breakdown of Blom Bank’s non- interest income between fees & commissions and trading & investment demonstrates that the former accounts for the majority of non-interest income with a contribution of 55% and 53% in 2009 and 2010 respectively; which we view as positive given its more stable and resilient nature as compared to trading and investment income.

Throughout the forecast period, we expect income from fees and commissions to grow robustly, hovering in the 25% range In 2009, income from fees and commissions totaled USD 81 mn, which remained almost unchanged relative to 2008. In contrast, fees and commissions totaled USD 97 mn in 2010, which represents a solid 21% growth relative to the previous year. Between 2011e and 2014e, we expect fees and commissions income to grow robustly with an annual growth rate in the 25% range. We support our view by the fact that this revenue stream is likely to be boosted by the Bank’s continuous balance sheet growth on the back of higher lending as well as management’s focus on asset management and private equity.

Moreover, Blom Bank is enhancing its insurance activities, a contributor to the Group’s fee income (5.7% in 2010 out of the USD 178 mn) as well as to the consolidated net profits (2.7% in 2010 out of the USD 331 mn) In this regard it should be noted that, besides being a major player in the Lebanese insurance industry through Arope Insurance, Blom Bank has expanded the reach of Arope to neighboring countries including Syria through Syria International Insurance (Arope Syria) in 2006 and more recently Egypt through Arope Egypt Life Insurances and Arope Egypt for Property Insurances.

25

Figure 22: Trading and investment income Figure 23: Fees and commissions income

100 100% 250 30% 80 80% 200 20% 60 60% 150 100

40 40% mnUSD USD mnUSD 10% 20 20% 50 0 0% 0 0% 2008 2009 2010 2011e2012e 2013e 2014e 2008 2009 2010 2011e2012e 2013e 2014e

Trading and investment income (lhs) % Growth (rhs) Net fees and commissions income (lhs) % Growth (rhs)

Source: Blom Bank and FFA Private Bank estimates Source: Blom Bank and FFA Private Bank estimates

Trading & investment income should continue to rise, albeit at a slower rate than during the past two years In light of a global downturn in financial markets, trading and investment income was USD 31 mn in 2008, roughly unchanged from 2007. In 2009, the figure totaled USD 55 mn for the year the equivalent of 76% yoy increase. This fast jump can be mainly attributed to the recovery of global markets positively impacting the pricing on the Bank’s financial assets, particularly from credit spread tightening on its fixed rate debt instruments. In 2010, trading and investment income amounted to USD 76 mn which highlights a 40% progression compared to the previous year. We have conservatively assumed Blom Bank’s trading and investment income to pursue a healthy growth yet slower than the one witnessed during the past two years. From 2011e to 2014e, our expectations revolve around 10% in annual growth for trading and investment income, reaching USD 112 mn by 2014e.

Non-interest income contribution to total operating income is low relative to banking peers, but should gradually pick up going forward Blom Bank generated USD 185 mn in non-interest income in 2010, equivalent to a contribution of 27% to total operating income, which suggests that Blom Bank’s non-interest income contribution to total operating income is low relative to its banking peers and that the Bank’s earning structure remain largely dependent on net interest income. In fact, looking at the sector, non-interest income as percentage of total income stood at an average of 35% for Alfa Banks in 2010. Driven by a sustained growth in both fees & commissions income and trading & investment income, we believe Blom Bank’s non-interest income is set to increase at a CAGR of 19% in 2010a-2014e. Ultimately, we expect Blom Bank’s non-interest income to reach USD 364 mn by 2014e increasing its share in total operating income from 26% in 2009 to 31% in 2014e. (c.f: figure 25)

Figure 24: Total operating income Fig.25: Net interest income vs. non-interest income

1,200 40% 100% 22.2%26.1% 27.2% 28.2% 29.2% 80% 30.2% 31.2% 1,000 30% 60% 800 20% 40% 77.8%73.9% 72.8% 71.8% 70.8%69.8% 68.8% mnUSD 600 10% 20% 400 0% 0% 2008 2009 2010 2011e2012e2013e2014e 2008 2009 2010 2011e 2012e 2013e 2014e Total operating income (lhs) % Growth (rhs) Net interest income Non-interest income

Source: Blom Bank and FFA Private Bank estimates Source: Blom Bank and FFA Private Bank estimates

Total operating income (c.f: figure 24) which we view as a more stable measure of income given that it excludes credit impairment charges, was USD 680 mn in 2010 which we expect to reach USD 1,166 mn by 2014e. The credit loss expense of USD 18 mn (vs. an income of USD14 mn) translated into a net operating income of USD 662 mn in 2010, which we expect to reach USD 1,131 by 2014e, on steadily growing provisions in line with its growing loan book.

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Tight cost control policy translating into higher cost-efficiency and further improvement expected for the coming years Underpinned by an organic and gradual growth and further supported by a strict cost-containment strategy, Blom Bank cost-to-income (total operating expenses / total operating income) ratio stands at a competitive level amongst Lebanese banks, playing a catalytic role in the Company’s ability to maintain high levels of profitability. In 2010 the ratio stood at 38.1% below its 2009 level (40.7%), explained by higher operating income growth compared to total operating expenses (personnel costs, depreciation costs and other operating expenses). Despite its expansion plans, we forecast Blom Bank to continue benefiting from an above average cost-efficiency level compared to its peers. We believe significant growth in operating income, partly driven by favorable operating leverage from international branches coupled with a continuous focus on cost- containment, including a more performance-based employee compensation structure, will lead to a gradual decrease of Blom Bank’s cost-to-income ratio from 38.1% in 2010 down to 37.6% by 2014e.

Figure 26: Growth in costs vs. growth in revenues Figure 27: Cost-to-income ratio 35% 30% 1,500 41% 25% 40% 20% 1,000 39% 15% 38%

10% mnUSD 500 37% 5% 36%

0% 0 35%

2008 2009 2010 2011e 2012e 2013e 2014e 2008 2009 2010 2011e 2012e 2013e 2014e

Operating income growth Costs growth T otal costs (lhs) Total income (lhs) Cost-to-income ratio (rhs)

Source: Blom Bank and FFA Private Bank estimates Source: Blom Bank and FFA Private Bank estimates

Strong net profits outlook for the coming years to support dividend increases In 2009, Blom Bank’s performance was strong in terms of profitability, as reflected by net profits of USD 293 mn equivalent to a 16.5% yoy increase. Despite a contraction in interest margins as well a slight decrease in cost-efficiency levels, this was driven by a greater share of non-interest income, double digit balance sheet growth and net credit income versus expense in 2008. In 2010 profits were up 13% yoy, with bottoming interest margins and earning asset growth driving net interest income, growing non-interest income, improving cost efficiencies, partially offset by credit loss expense versus net credit income the year prior (pre- provision operating income was up nearly 20% yoy).

Going forward, net profits are expected to grow at a CAGR (10-14e) of nearly 15% to reach USD 575 mn by 2014e, reflecting solid improvement in operating income although moderated by a reversion towards some credit loss expenses as potential for further reserve release declines. We support our positive outlook on Blom Bank’s rise in the bottom line going forward by the following factors: (i) solid growth in earning assets on the back of increased lending (ii) easing pressures on interest spreads given bottoming funding costs and as international rates eventually pick up (iii) focus on fees and commissions income generation, and (iv) continuous improvement in cost efficiency levels.

We forecast EPS to common shareholders to increase from USD 1.42 in 2010 to USD 2.52 in 2014e. We expect a book value per share of USD 14.26 in 2014e, up from USD 8.46 in 2010.

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Solid growth in earnings coupled with a solid capitalization and conservative policy provides scope for dividend increase Blom Bank paid a 600 LBP annual common share dividend for the 2009 year, up from 550 LBP paid on the 2008 year, targeting a dividend payout of 30%. As Blom bank continues to grow earnings, demonstrate solid capital levels, and continue to pursue an organic expansion strategy, we expect there is scope to increase dividends over time.

Figure 28: Net profits Figure 29: ROAA and ROAE

19.5% 2.00% 600 30% 19.0% 500 1.80% 18.5% 400 20% 18.0% 1.60% 300 17.5% 1.40% USD mnUSD 200 10% 17.0% 100 16.5% 1.20% 0 0% 16.0% 1.00% 2008 2009 2010 2011e 2012e 2013e 2014e 2008 2009 2010 2011e2012e2013e2014e

Net profits (lhs) % Growth (rhs) ROAE (lhs) ROAA (rhs)

Source: Blom Bank and FFA Private Bank estimates Source: Blom Bank and FFA Private Bank estimates

Above average return ratios expected to further improve in the coming years Blom Bank has traditionally boasted above-average return ratios compared to the sector, which can be explained by the Bank’s conservative approach for growth based on above average interest margins and cost- efficient operations as compared to the sector average, as well as on organic growth. Based on our positive outlook regarding earnings we see Blom Bank’s ROAA and ROAE to continue to gradually improve. We expect the ROAE to reach 19.3% by 2014e up from 18.3% in 2010, whereas the ROAA is forecasted to reach 1.79% in 2014e as compared to 1.54% in 2010.

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REVISED VALUATION

Valuation methodology

Our valuation methodology is based on the Dividend Discounted Model (DDM). Our forecasts span a five year forecasted period followed by a 15 year fading period whereby the return on equity converges to the cost of equity. The cost of equity of 14.5% is derived using the capital asset pricing model weighted by the size of geographical operations. The terminal value assumes a perpetual growth rate of 3%. Additionally, we have corroborated our DDM methodology by means of a residual income valuation. We note that for every 1% change in our cost of equity assumption, our fair value estimate would be impacted by approximately USD 1.00 per share.

Revised fair value estimate and recommendation

Based on our revised forecasts and discount rate assumptions to our Dividend Discount Model, our fair value estimate of USD 12.00 per share, is derived from discounted dividends attributable to common shareholders in excess of required capital amounts. Our fair value estimate implies a P/B of 1.24x on our book value per share 2011 estimates, in line with its 3 year historical average of 1.22x, while above its current trading of 1.08x. Blom Bank shares trade at a 4.4% dividend yield, using the LBP 600 dividend approved in 2010 (up from previous LBP 550 in 2008).

We assign an Overweight recommendation given that the current price of USD 9.14 is at a discount of more than 10% of our fair value estimate of USD 12.00.

Table 9: Fair Value Derivation

Valuation (USD mn) PV Forecasted (5 year period) 419.3 PV Fading (15 year period) 969.6 PV Terminal Value 399.1 PV Excess Capital 856.3 Equity Value 2,644.3 Number of shares 215.0 Value per share 12.30 Value per share (rounded) 12.00

Source: FFA Private Bank estimates

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KEY INVESTMENT RISKS

Credit Risk We have assumed stable credit quality over the forecasted period. Any significant deterioration in the credit portfolio beyond our expectations would require greater provisions for credit losses unfavorably impacting operating results.

Interest Rate Risk Blom Bank is susceptible to changes in interest rates given its mismatch in assets and liabilities. We expect a stable and rising interest rate environment over our forecasted period and any shocks would adversely impact equity levels.

Sovereign Risk While the strong economic expansion is improving the public debt burden over the past years, and the majority of sovereign assets are domestic banks holding for the longer-term, Blom Bank’s exposure to Lebanese government assets including reserves, certificates of deposits, treasury bills, and Eurobonds is significant.

Economic and Political Risk Blom Bank is subject to the macroeconomic environment in which it operates, and a downturn in the economy or rising political or security pressures would impact the company negatively, particularly in its domestic Lebanese market.

Foreign Operations Risk Blom Bank’s growth strategy is in part dependent on the execution of its geographic expansion in the region and on its current operations in key foreign markets including Egypt, Syria, and Jordan.

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FINANCIAL STATEMENTS

Balance sheet

In USD millions 2008a 2009a 2010a 2011e 2012e 2013e 2014e Cash and balances with central banks 2,375 3,114 2,818 2,990 3,069 3,142 3,204 Due from banks and financial institutions 3,859 3,8394,073 4,501 4,985 5,5333,936 Financial assets held for trading 9 16 53 21 24 26 29 Financial assets designated at fair value through profit or loss 54 92 92 107 118 131 146 Loans and advances to customers 3,470 4,011 5,174 5,988 6,915 7,988 9,233 Loans and advances to related parties 5 8 6 8 9 11 13 Bank acceptances 134 131 138 151 166 183 201 Financial investments - available for sale 3,112 3,114 2,730 3,216 3,553 3,935 4,368 Financial assets classified as loans and receivables 4,043 5,440 6,341 7,075 8187, 8,658 9,610 Financial investments - held to maturity 421 514 605 643 711 787 874 Property and equipment 215 249 274 301 331 364 401 Intangible assets 4 4 4 4 5 5 6 Goodwill 42 42 47 47 47 47 47 Other assets 155 128 118 150 163 178 194 Total assets 17,898 20,702 22,336 24,776 27,431 30,441 33,860 Due to banks and financial institutions 794 468 251 279 308 341 379 Customers' deposits 15,016 17,817 19,446 21,439 23,690 26,237 29,123 Deposits from related parties 93 153 108 174 193 214 237 Engagements by acceptances 134 131 138 151 166 183 201 Other liabilities 402 425 491 565 622 684 753 Minority interest 80 86 84 87 91 96 101 Shareholders' equity 1,379 1,623 1,819 2,080 2,361 2,687 3,066 Total liabilities and shareholders’ equity 17,898 20,702 22,336 24,776 27,431 30,441 33,860

Source: Blom Bank and FFA Private Bank estimates

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Income statement

In USD millions (Except per share data) 2008a 2009a 2010a 2011e 2012e 2013e 2014e Interest and similar income 1,082 1,136 1,203 1,272 1,411 1,572 1,755 Interest and similar expense (672) (717) (708) (721) (789) (866) (953) Net interest income 410 419 495 551 622 706 802 Net fees and commissions income 81 81 97 120 151 190 237 Net profits from financial operations 31 54 76 84 92 102 112 Other operating income 5 12 11 12 13 14 16 Net non-interest income 117 148 185 216 256 305 364 Total operating income 527 567 680 767 879 1,011 1,166 Credit loss (expense) income (19) 14 (18) (21) (25) (29) (35) Personnel expenses (116) (127) (147) (169) (194) (223) (257) Depreciation and amortization (18) (23) (23) (24) (27) (30) (33) Other operating expenses (75) (80) (89) (100) (114) (130) (149) Net profit from sale or disposal of other assets 3 0 0 0 0 0 0 Profit before tax 304 350 401 452 518 598 693 Income tax (52) (57) (71) (77) (88) (102) (118)

Net profit 252 293 331 376 430 496 575 Group share 242 285 321 364 417 482 558 Minority interest 9 8 10 11 13 15 17 EPS to common (basic / diluted) 1.07 1.29 1.42 1.62 1.87 2.17 2.52

Source: Blom Bank and FFA Private Bank estimates

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