ANNUAL REPORT 2017 STATEMENT OF THE CHAIRMAN AND GROUP CHIEF EXECUTIVE OFFICER BANK AUDI ANNUAL REPORT 2017 STATEMENT OF THE CHAIRMAN AND GROUP CHIEF EXECUTIVE OFFICER The Bank’s performances in the year 2017 closely reflect the strategic choices and orientations adopted by Management, focusing on In a competition-driven industry where clients have the luxury to switch banks and financial institutions, quality service and experience strengthening the Group’s financial standing and reinforcing its financial flexibility, while sustaining its profitability in spite of tough remain a major competitive strength that increases customer retention and loyalty. Our aim is to offer a full banking experience across operating conditions. These performances reinforced the Group’s leading positioning in the domestic market and among leading all physical and digital channels. As we move forward with customer centricity, our main objective is to enhance customers’ experience regional banking groups at the service of a wide range of customers. Still, continuing tough politico-security conditions in the region and profitability through the provision of a broader products’ holding. have made the Bank adopt a “consolidation mode” in its main markets while maintaining its network, ready to capture growth opportunities as they arise. In parallel, the Group is currently targeting the realisation of better efficiency in the medium term at both That said, among the most important developments of 2017 was probably the completion of the first year of our new SME proposition revenue and cost levels in order to further reinforce its financial standing and create value to shareholders. newly launched in Lebanon, Egypt and Turkey under the directives of the IFC and encompassing a comprehensive array of products and services expected to form a major business line. The year ended with 5,000 files processed in Lebanon and with 3,000 applications In fact, the Bank maintained in 2017 a sustained activity in a tough operating environment. Consolidated assets reached approved for a total value of USD 180 million. It is worth mentioning that 30% of the SME customers covered are new to the Bank, USD 43.8 billion at end-December 2017, and USD 55 billion when accounting for fiduciary deposits, security accounts and assets under which reflects the Bank’s efforts to reinforce financial inclusion at large, reaching a large number of untapped companies in the management, sustaining Bank Audi’s ranking at the forefront of the Lebanese banking sector. Actually, consolidated assets decreased domestic space. by USD 515 million relative to end-December 2016, driven by a contraction of Odea Bank’s assets by USD 2 billion, within the context of the adoption by Odea Bank’s Management of a policy favouring activity consolidation while further reinforcing risk control, aiming at It is important to mention as well that the results of the past year and the strategic directions of our Group are being supported by forgoing unstable costly deposits while not renewing some maturing loans with limited contribution to the franchise building. significant developments in support functions, such as IT and HR. The Bank’s performance was not realised at the detriment of its financial standing which continued to bear witness to a strong financial At the IT level, we have introduced a number of innovations in branches, such as fully automated electronic branches, ITM in soundness in the realms of liquidity, asset quality, capitalisation and profitability. At the level of liquidity, primary liquidity placed with self-service areas that extend service hours over video banking; instant issuing of debit card via the entertaining and informative central banks and foreign banks continued to increase to reach USD 21.2 billion as at end-December 2017, representing 63.3% of artificial intelligence robot “NOVOT”; all these are effectively adding convenience and speed to our services while introducing banking customers’ deposits, a high level when compared to regional and global averages. to millennials, allowing us to groom the next generation of customers. Capturing the opportunities of digitisation and digital banking services, Bank Audi is always looking to introduce new innovative credit cards and new payment solutions. At cards level, we are At the level of asset quality, despite the delicate operating conditions across a number of countries of presence of the Group, implementing Host Card Emulation (HCE) and contactless payment towards establishing a cashless economy. On the e-payment front, consolidated gross doubtful loans continued to represent 3.5% only of gross loans at end-December 2017. In parallel, the coverage we are deploying new payment services seamlessly across all channels, aimed at a frictionless transactions between billers and payers. ratio of doubtful loans by specific provisions and real guarantees reached 107% at the same date, of which 60% by specific provisions. Both initiatives add to the attractiveness of the Bank’s proposition. Areeba, a specialised electronic payment solution, has recently Management is putting a special emphasis on following up on the quality of the loan portfolio and ensuring an adequate provision bought the card acquiring activity of Bank Audi and is handling the management of the processing platform for the Bank. coverage. Within this context, Bank Audi had USD 440 million of collective provisions as at end-December 2017, a level which exceeds the requirements of the Central Bank of Lebanon. At the HR level, the year 2017 witnessed several important key factors that pushed the Human Resources function even further in the Group’s main entities: Bank Audi Lebanon, Odea Bank in Turkey and Bank Audi sae (Egypt). At the capitalisation level, consolidated shareholders’ equity grew by 13.2%, from USD 3.7 billion as at end-December 2016 to USD 4.2 In Lebanon, the Recruitment and Selection (R&S) team hired 281 resources to cover the needs within the different branches and billion as at end-December 2017, representing 22% of the consolidated equity of the Lebanese banking sector. This translated in an departments at the Bank, while the Training and Development (T&D) team covered over 116,325 training hours targeting the additional improvement of the Bank’s capital adequacy ratio as per Basel III to 16.9% as compared to 14.8% at end-December 2016, advancement of the human capital technical and behavioural skills. Bank Audi sae (Egypt) continued to maximise the value of human while core equity ratio (CET1) increased from 9.1% to 10.5%. capital while ensuring their alignment with the Bank’s strategies, with over 500 employees promoted to higher positions, while training activities mainly focused on promoting higher levels of user adoption and preparing employees to properly use Flexcube and Newgen – At the profitability level, Bank Audi sal achieved a good performance in 2017, with consolidated net profits of USD 559 million, reaching the new core banking systems. Last but not least, Odea Bank kept its dedication and strategic business partnering efforts to keep USD 464 million when excluding profits from discontinued operations, thus representing a net growth of 13% relative to the recurrent employees motivated, dedicated and performing optimally. net profits of 2016. The contribution of entities outside Lebanon to consolidated net profits reached 45% over the period, of which 19% from Odea Bank. In fact, Odea Bank’s net profits after tax reported a net growth by 29%, reaching USD 88 million in 2017, and Looking forward, we will be looking throughout 2018 to strengthen our leadership in Lebanon, as well as to consolidate our market this after the allocation of USD 95 million of loan loss provisions. The contribution of Bank Audi in Egypt to consolidated net profits profile in Turkey and Egypt, while continuing to grow the AUM for the Private Banking business. This should translate to a sustained, reached USD 55 million, i.e. 12%. Those results were realised following an allocation of USD 144 million of consolidated net loan loss albeit measured, growth in assets in the coming years, with a more than proportional increase in net earnings due to economies of provisions, thus reinforcing the Bank’s asset quality and resilience. scale and productivity gains. Bank Audi aims at becoming a privileged partner to customers in main countries of presence, through ensuring a wide and diversified array of banking products and services that takes into account technological advancements and the Based on such results and excluding profits for the sale of the Card and Electronic Payment processing and acquiring activities, the global development of the profession. Bank’s return on average assets ratio reached 1.1%, while the return on average common equity registered 13.4% in 2017. In parallel, the common book per share increased to USD 8.09, while the earnings per common share reached USD 1.03. This corresponds to a In parallel, our CSR practices aim at implementing effective changes enabling growth and economic progress. Those are visible through price to book multiple of 0.74 times based on an ordinary share price of USD 6.00 as at 29 January 2018, and a price to earnings multiple our contribution to the economy and the alignment of our business proposition with the Sustainable Development Goals we have of 5.6 times, both levels being quite low when compared to peer regional banks averages in relation to the Group’s profitability and to chosen to champion; empowering the