2019 ANNUAL REPORT ANNUAL REPORT 2019 STATEMENT OF THE CHAIRMAN AND GROUP CHIEF EXECUTIVE OFFICER BANK AUDI ANNUAL REPORT 2019 STATEMENT OF THE CHAIRMAN AND GROUP CHIEF EXECUTIVE OFFICER Dear stakeholders, - Successfully raised USD 210 million as part of the first phase of the capital increase that was requested from all banks by the Central Bank of Lebanon as per Intermediary Circular 532. Shareholders owning 65% of the Bank’s capital participated in this I hope you and your families are keeping safe and well in those extraordinary and unsettling times. increase, among which the European Bank for Reconstruction and Development (EBRD), with USD 7.8 million, underlying a As I write, the regional economic situation and the local Lebanese political crisis, coupled with the spread of COVID-19 virus, renewed commitment from the shareholders to support the Bank within the prevailing exceptional situation, and a signal of have thrown our world into disarray. These three distinct crises brought multiple shocks in one: a public health disaster, a blow trust in the Bank’s status and outlook. Bank Audi, which was one of few Lebanese banking groups to successfully close the to the real economy, and a stress test for the financial system as we know it. first phase, is currently assessing recapitalisation plans based on various scenarios, the finalisation of which pre-requires the alleviation of the prevailing uncertainties, with the adoption of a final reform program by the authorities for implementation. 2019 was undeniably one of the most challenging years in the Group’s history. The broad concerns over the adverse political and economic developments affecting several countries of presence of the Group in the region, more specifically Lebanon and Our consolidated assets contracted by 6.5% in 2019, reaching USD 39.5 billion as at end-December, compared to USD 42.3 Turkey, exerted increased pressures on the operating conditions of Bank Audi Group in those countries. billion as at end-December 2018. Owing to the aforementioned USD 1.2 billion of one-off crisis related loss allowances, the Group reported a net loss of USD 602 million in 2019. Adjusting to those one-off allowances, Bank Audi would have reported Global geopolitical tensions and accrued trade concerns led to softer economic activity globally and a further economic USD 489 million of net profits from operations after provisions and taxes compared to USD 501 million in 2018, implying a slowdown in the MENA region. Real GDP growth for the Arab world has decelerated to around 1.9% in 2019 from 2.4% in decrease of 2.4%. Return on average assets would then stand at 1.19% as at end-December 2019 compared to 1.18% as at 2018, while Turkey’s real GDP growth reported a decline from 2.8% in 2018 and 0.9% in 2019. Lebanon, where the Group end-December 2018. In turn, net common income would have represented 15.2% of average common equity compared to has more than 60% of its operations, saw its real economy moving into a recessionary mode, with net contractions across a 14% as at end-December 2018. number of sectors of economic activity. It is without a doubt that our presence across multiple geographies in the region and Europe gives us a very important Lebanon has been hit by a severe economic crisis that combines fiscal, financial and political instability, which was also competitive edge in terms of diversification of our assets and profit sources. As at end-December 2019, 38% of consolidated exacerbated in the aftermath of the “17 October” nationwide civic protests. As these protests sustained, the political and assets were contributed by operations outside Lebanon, which accounted also for 30% of operating profits before the economic uncertainties deepened which, in turn, triggered international credit rating agencies to cut their credit ratings of one-offs. Bank Audi Egypt, Banque Audi (Suisse), and Bank Audi sal – Jordan Branches continued to be the largest contributors Lebanon and Lebanese banks, while the state defaulted on sovereign Eurobonds in March 2020. On this backdrop, operating among entities operating abroad, with net profits of USD 79 million, USD 31 million and USD 11 million respectively. Odea Bank conditions of banks in Lebanon were quite difficult. The Central Bank of Lebanon and the Association of Banks issued a number reported on a stand-alone basis net profits of USD 12.6 million, despite allocating a large portion of its operating profits before of exceptional regulatory decisions and measures to allow Lebanese banks to support their financial standing and withstand provisions to loss allowances on legacy loans. Today, the Group remains committed to reinforce the performance of foreign the material challenges and uncertainties they are facing while preventing capital flight. Deposits in Lebanon contracted by subsidiaries while growing their operations with the strongest returns. a cumulative USD 15.4 billion in 2019, of which USD 11.4 billion in the last quarter of the year, with private sector loans contracting by a yearly USD 9.6 billion to USD 49.8 billion at end-December 2019. Banks’ profitability came under pressure in Given the unprecedented crisis that we witnessed in the fourth quarter of 2019, Bank Audi’s team went on crisis management 2019 due to tax increases and significant provisioning requirements. mode with an aim to absorb and mitigate all possible risks that we could face. The material adverse changes in the operating conditions in Lebanon has imposed on Bank Audi, in common with other With economic activity slowing considerably, the Bank continued to reschedule and restructure debt packages, offering ways Lebanese banking groups, a new strategic direction. It includes strengthening the capital base to absorb any potential of putting debt repayments back on a realistic and sustainable basis. Customers’ banking needs were promptly attended for in losses from non-performing exposures; enhancing the application of risk monitoring and management; and reinforcing the an uninterrupted manner through the Bank’s fully integrated 24/7 Contact Center and our state-of-the-art Alternative Delivery performance of foreign subsidiaries amid a further rationalisation of operating expenses in the aim to create a leaner and more Channels (ADC) (i.e. Smart ATMs, Interactive Teller Machines (ITMs), Mobile and Online Banking, as well as Chatbot). Contact competitive group. Center agents not only answered all clients’ inquiries efficiently, but also contacted back all unanswered calls that reached in total 7,000 per day at its peak. ATM were replenished around the clock, with USD and LBP bank notes to absorb high Meanwhile, Management had to take immediate measures that will allow the Group to navigate through the challenges of customer demand. More than 100,000 of BASAL clients were served with around 300,000 transactions performed through the upcoming transitory period in Lebanon amid the conception and the subsequent implementation of an economic reform digital channels mainly ATMs and Audi Online. plan. In view of the severity of the economic and financial crisis that has befallen Lebanon and its inevitable repercussions, the Bank made a decision to allocate USD 1.2 billion to Expected Credit Loss allowances in 2019. Notwithstanding, the significant We believe in the fundamentals of the countries where the Group is present. We will continue to stand behind our commitment uncertainties of outcome and challenges prevailing in Lebanon for months now, as well as the failure to date to reach a clear, to our role of financial intermediation by providing the financing needs to all our stakeholders. Our key priority is to continue to definite and definitive plan by the authorities for a financial and economic recovery, made it very difficult for external auditors focus on the provision of a best-in class service to our customers, and in particular our core relationships, while supporting our to assess the effects of the Lebanese crisis on the financial standing of all Lebanese banks. In this context, external auditors risk profile and capital buffers to set the stage for renewed growth as soon as economic conditions start to improve. expressed a negative opinion on Bank Audi’s financial statements for the year 2019, and the Board of Directors announced its The Group’s commitment to operate responsibly remains intact throughout its strive to ensure sustainable development while understanding and approval of this opinion. taking into account the economic, social and environmental conditions of our operations in Lebanon and abroad. The measures taken by the Group encompass: In closing and on behalf of the Bank’s Board of Directors, I would like to express our regrets for the restrictions the Bank had to - Provide fully for the Group’s exposure to the Lebanese Sovereign Eurobonds whose nominal value stood at USD 1.98 billion implement during these exceptional times, in line with the Central Bank of Lebanon. I would also like to thank our customers for as at end-December 2019. Based on the cash flows that the Group expects to receive and largely exceeding what is required their continuous understanding, to acknowledge the extraordinary and exemplary efforts made by all our staff members, and by BdL Circular 44, as amended by Intermediary Circular 543 of 3 February 2020, in particular after the Lebanese state to express my gratitude to our shareholders for their permanent support. announced that it had stopped payment, this amounted to USD 591 million of additional loss allowance on these financial assets, leaving a net exposure of USD 120 million as at end-December 2019, which dropped to USD 57 million as at 30 June 2020. As the Group sold these Eurobonds in the first six months of 2020, the associated ECL was released to maintain at all Samir N.