1 BANK AUDI ANNUAL REPORT 2015 3 BANK AUDI ANNUAL REPORT 2015 2 3 STATEMENT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER BANK AUDI ANNUAL REPORT 2015 STATEMENT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER In 2015, Bank Audi continued to have an undisputed leadership position among Lebanese banking groups in terms of most business criteria, and As to Turkey, established from scratch in 2012, our subsidiary Odea Bank which was the first financial institution in the last 12 years to be granted to reinforce its position among the top 20 Arab banks, while maintaining a strong financial standing and moving forward on its main strategic deposit-taking and operational licenses from the Banking Regulatory and Supervisory Authority, is now recognised as a leading challenger bank orientations in its various markets of presence. with a universal banking model and market leading productivity levels, as well as strong brand recognition and customer awareness. As of 31 December 2015, Odea Bank had USD 11 billion of assets, USD 8.6 billion of deposits and USD 7.5 billion of loans, ranking 9th, 8th and 9th respectively, amongst The Bank actually maintained in 2015 a sound activity growth in a tough operating environment, coupled with a growing contribution of foreign non-state owned Turkish banks. Odea Bank achieved breakeven by the second quarter of 2014, 19 months after launch, posting USD 23.2 million of net entities. Its consolidated assets recorded a nominal increase of USD 310 million in 2015, reaching a total of USD 42.3 billion at end-December 2015 earnings in 2015, highlighting a strong performance that Management is looking to turn into an exponential growth. This robust growth is even and USD 52.1 billion when accounting for fiduciary deposits, security accounts and assets under management. When adjusting to the devaluation of more important when considering that it was achieved by a green field operation, without incurring any goodwill expense. the exchange rates of both the Turkish Lira and the Egyptian Pound relative to the US Dollar of respectively 25.6% and 9.5% in 2015, consolidated assets of Bank Audi would have increased by USD 2.1 billion over the same period, due to the nominal growth in assets of the Bank’s entities in This performance is attributed to the fact that Turkey is a sizeable emerging country with a track record of sustained economic growth, reaching on Turkey and Egypt by USD 1.3 billion and USD 0.8 billion respectively, with assets of Lebanese entities increasing slightly by USD 242 million. Based average 4.2% per annum over the last 5 years, but also to the best-in breed talent pool of Odea Bank and its pioneering role in terms of innovation, on the above, the contribution of entities outside Lebanon to consolidated assets increased from 48.1% as at end-December 2014 to 48.6% as granting it significant market competitive advantages. Building on the above, our plan in Turkey is to develop a value-added SME and consumer at end-December 2015, while the share of assets booked in investment grade countries reached 33.3%, an unprecedented level among Lebanese lending segment while leveraging on the wide footprint in the MENA region to benefit from the expected growth of trade, financial and human banking groups. flows between Turkey and Arab countries to further develop Corporate and Commercial Banking. In parallel, consolidated customers’ deposits sustained the same level during 2015, reaching USD 35.6 billion at end-December 2015, of which Likewise, Bank Audi sae, the Bank’s subsidiary in Egypt, has been resilient to successive political transitions since 2011, sustaining solid growth 45.1% from entities outside Lebanon. When adjusting on the basis of constant exchange rates for both Turkish Lira and Egyptian Pound trajectory outpacing peers with 19% CAGR in assets and 29% in net profits over the 2010-2015 period. It has sound credit policies focusing on as at end-December 2014, consolidated deposits would have increased by USD 1.1 billion, corresponding to a growth of 3%, deemed a good defensive businesses translating into a NPL ratio of 1.4%, well below the sector average. Bank Audi sae represents an efficient and profitable performance given the weak 1.5% deposits’ growth in the region following the sharp deterioration of oil prices. Likewise, Bank Audi’s consolidated growing bank with an average ROAA and ROACE of 1.4% and 17.4% over the 2010-2015 period. Its new development plan encompasses the loan portfolio sustained its growth over the period registering a nominal growth of 4.4% (equivalent to a nominal increase of USD 758 million), expansion of the network and extension of the scope of products and services to cover new business segments such as Islamic Banking, mass reaching 10.4% in real terms when adjusting on the basis of constant exchange rates for Turkish Lira and Egyptian Pound as at end-December 2014, influent, mortgages and others, building on a visible and highly regarded brand. corresponding to a real increase of USD 1.8 billion, mainly stemmed from the entities in Lebanon, Turkey and Egypt. At the level of Private Banking, the recent restructuring of the business line is likely to improve intergroup synergies and efficiencies. The partnership The Bank’s growth was not realised at the detriment of its financial standing which continued to bear witness to a strong financial soundness at the with Crossbridge Capital based in London would create a centralised and specialised wealth management platform. The plan to establish a footprint level of liquidity, asset quality, capitalisation or profitability. In fact, the Bank maintained its highly liquid status, with consolidated primary liquidity in the United Kingdom would support the Private Banking development strategy and future expansion to Sub-Saharan Africa and Latin America placed with central banks and foreign banks continuing to increase, reaching USD 16.4 billion at end-December 2015, the equivalent of 46.1% of where Audi Private Bank sal already holds AuMs of USD 588 million and USD 745 million respectively through dedicated desks and RMs. customers’ deposits, a high level when compared to regional and global averages. The results of the past year and the strategic directions of our Group are being supported by significant developments in support functions, such At the asset quality level, a reinforcement of the Bank’s loan quality was realised through the allocation of USD 133 million of consolidated net loan as HR and IT. At the HR level, the year 2015 was concluded with various successful accomplishments around areas of Recruitment and Selection, loss provision charges during 2015. Subsequently, loan loss reserves on doubtful loans reached USD 371 million, translating into a coverage ratio Training and Development, Relationship Management and Organisational Development. Bank Audi continued to own up to its position as the of 68.4% at end-December 2015. In parallel, collective provisions reached USD 162 million, representing 0.9% of net loans, while the ratio of net largest employer in the Lebanese private sector at large and the most significant contributor to job creation in Lebanon. It has the most advanced doubtful loans to gross loans improved from 3.05% at end-December 2014 to 2.94% at end December 2015. The ratio of gross doubtful loans to recruitment processes fully recognised in Lebanon and the region for being a benchmark in the selection strategy with a comprehensive talent gross loans of Bank Audi remains low when compared to the sector averages in Lebanon (3.6%), the MENA region (3.9%), the emerging markets attraction strategy (87% of staff being university graduates). The Recruitment and Selection efforts for 2015 resulted in the engagement of circa (6.9%), and the world (7.5%). 500 new employees from diverse backgrounds for different positions within the Group that now counts around 6,900 employees in total. In parallel, the Bank continued to be supported by wide full fledged training activities which were intensively focusing on academy courses and managerial At the capitalisation level, consolidated shareholders’ equity reached USD 3.29 billion at end-December 2015, accounting for 18% of the total and behavioural trainings over the past year. shareholders’ equity in the Lebanese banking sector. In parallel, Bank Audi’s regulatory capital reached USD 3.35 billion, reinforcing the Bank’s capital adequacy ratio as per Basel III, to 13.4%. At the IT level, Bank Audi’s IT continued the implementation of multiple transformational business projects across many of its affiliates. Analysis, selection and high-level design have been completed – and the implementation work initiated – on several strategic projects: Core Banking At the profitability level, Bank Audi’s net earnings after provisions and taxes amounted to USD 403 million in 2015, as compared to USD 350 million replacement, a new Omni-channel banking platform, a new automated Business Process Management system, and a new Customer Relationship in 2014, growing by 15.1% year-on-year. Entities outside Lebanon contributed up to 50.5% of the consolidated net earnings’ growth, driving an Management system. When operational, these systems together will redefine the way the Bank produces and delivers state-of-the-art services to its increase in the share of these entities in consolidated net earnings from 41.6% in 2014 to 42.8% in 2015. The increase in net profits primarily customers. In all entities, new systems are being deployed while leveraging Bank Audi’s IT strategy of service-based architecture, with the Enterprise stems from a USD 87.3 million increase in total revenues, corresponding to a growth of 6.6% exceeding the 5.3% growth in consolidated general Service Bus being at the core of the environment, orchestrating and integrating the different components together.