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ANNUAL REPORT 2015

MANAGEMENT DISCUSSION & ANALYSIS

2.0. STRATEGY

Over the last decade, Bank Audi has successfully expanded in the MENA region, achieving a sound and steady growth, and delivering a solid financial performance. Consolidated assets reported a CAGR of 16.0%, moving from USD 7.1 billion at end-December 2003 to USD 42.3 billion at end-December 2015, with net profits reporting a CAGR of 18.2%. This performance bears witness to the Group’s strong resilience against adverse developments including, most importantly, the 2008 financial crisis and the 2011 Arab uprisings. A key turning point was, in November 2012, the launching of the Group’s activity in the Turkish market after having obtained the first banking license granted by the Turkish authorities in more than 14 years. Since then, in just 3 years of activity, the Group succeeded in building USD 11.0 billion of assets in Turkey (driven by USD 8.6 billion of customers’ deposits), ranking the subsidiary 9th among 31 operating private commercial banks.

In parallel with this business performance, and over the same period, the Group’s governance practices have also evolved, in line with the evolution of international best practice, to accompany the expansion plan with effective independent controls and risk-based oversight by the Board and its committees.

Today, the Group continues to shape itself as a large regional bank in the MENAT region with Commercial, Retail and Private Banking being its main business lines. The Group’s main strategic orientations evolve around the following main development pillars:

management stratetgy

2.1. STRONG LEADERSHIP IN LEBANON

Bank Audi’s roots in its home market go back to 1830 when it started as a financial company, underscoring a long history of tradition and experience. Today, the Bank has the most universal banking profile among peers with leading domestic market shares. Going forward, Lebanon will remain a pivotal part of the Group’s overall activity in spite of the prevailing challenging environment. In particular, the Bank will leverage on existing corporate relationship, expertise and regional presence to grow the regional business with a focus on trade. It will continue to build on its strengths in the SME sector where it is currently in the process of upgrading its value proposition to become a high value driver for the Bank. It is also reinforcing its internal capabilities in order to improve the service it gives to entrepreneurs and small businesses. On the Retail Banking front, the Bank recently introduced a customer-centric model supported by innovative delivery channels, state-of-the-art technologies, and a wide range of tailored products and services to improve customers’ experience, retention and profitability.

2.2. EXPANSION OF NETWORK AND OF PRODUCT RANGE IN EGYPT

Over the last 5 years, from end-December 2010 to end-December 2015, and despite the many turnarounds and setbacks of the Egyptian environment, Bank Audi Egypt has reported a total assets’ CAGR of 19% and a net profits’ CAGR of 29%, with assets reaching USD 4.8 billion at end-December 2015 and net profits reporting USD 57.6 million in 2014 and USD 69.5 million in 2015. The Bank has also adopted sound credit policies focusing solely on defensive businesses translating into an NPLs ratio of 1.4%, well below the sector’s average.

On the backdrop of these achievements, the Group decided to launch a new development plan in Egypt for the 2014-2019 period, focusing on doubling the size of the franchise with a corollary improvement in net profits. This would allow Bank Audi Egypt to rank 6th among the 33 private banks at the horizon. This would be achieved through the expansion of the network, rolling up 26 new branches over the coming 4 years, and extending the scope of products and services to cover new business segments such as Islamic, mass affluent, mortgages and others.

2.3. FRANCHISE BUILDING IN TURKEY

The expansion strategy in Turkey was initially determined by the exponential growth of trade, financial, and human flows between Turkey and the Arab world where the Group is present in 6 countries. In fact, trade flows between the 2 regions increased from USD 3 billion in 2002 to USD 39 billion in 2015, still representing less than 2% of the combined trade turnover of Turkey and the Arab world, bearing witness to the significant additional growth prospects. Accordingly, acquiring a captive market share in this business would ensure yearly growing recurrent revenues for the Group.

Nonetheless, the opportunity that Bank Audi had to obtain a license for a greenfield operation, rather than pay a premium to acquire a Turkish bank, provided it with an increased flexibility to hire top talents in the Turkish banking industry, allowing it also to cover the domestic market. Odea Bank has subsequently established a leading challenger bank franchise with a universal banking model and market leading productivity levels as well as a strong brand recognition and customer awareness during this three-year period. As of 31 December 2015, Odea Bank had a 1.4% market share in assets, 2% in customers’ deposits and 1.5% in net loans, respectively, ranking 9th, 8th and 9th amongst non-state owned commercial Turkish banks. Odea Bank’s operations achieved breakeven by the second quarter of 2014, highlighting the Bank’s strong performance and underlying profitability, notwithstanding the required start-up and marketing costs. Based on this remarkable growth performance, the Group is looking to replicate and develop, over the coming 4 years, a market leading banking footprint allowing a successful listing before May 2019, as mentioned in the Offering Circular related to the USD 300 million capital increase closed by Bank Audi in September 2014. The development plan will focus on a value-added SME and consumer lending segment while leveraging on the wide footprint in the MENA region to benefit from the expected growth of trade, financial and human flows between Turkey and Arab countries to further develop Corporate and Commercial Banking.

2.4. CONSOLIDATING PRIVATE BANKING AND WEALTH MANAGEMENT ACTIVITIES

With over 37 years of presence in Switzerland where the Group holds the second largest Arab private bank in terms of AuMs, the Private Banking business line is one of the strategic key development pillars of the Group, alongside its three key geographies (Lebanon, Turkey, and Egypt). In addition to Banque Audi (Suisse), it operates through 3 main subsidiaries in Lebanon, Saudi Arabia and Qatar, with additional offices in Monaco, Jordan and Abu Dhabi.

Following the successful implementation of a revised business model aiming at improving intergroup synergies and efficiencies, the Private Banking net profits reached USD 46.9 million in 2015. Consolidated AuMs and custody accounts reached USD 9.8 billion at end-December 2015, a level which compares competitively with portfolios managed by regional banks. The Private Banking strategy over the coming 4 years consists of increasing significantly AuMs and custody accounts, generating on average 10 to 12% of the Group’s total revenues and net profits at the horizon. The plan is also to establish a footprint in the United Kingdom (through a light structure) to support the Private Banking development strategy and future expansion to Sub-Saharan Africa and Latin America.

At the level of other entities, the Group is adopting a consolidation mode in Jordan. In Syria and Sudan, it is sustaining a minimum operating activity in those markets while maintaining the footprint ready to grab primarily reconstruction opportunities should the countries succeed their political transitions. The Group continues to retain a large flexibility in those markets to adjust to whatever off-putting trends in the environment. Following being granted a license for 7 branches, Bank Audi is also expecting to launch its operations in Iraq during the course of 2016.

These above mentioned objectives would provide the Group, by 2019, with an improved competitive regional positioning and higher visibility. Consolidated assets and net profits would increase by 1.4 times, along with an almost 2-fold incr ease in net profits relative to the current annual level. Lebanon, Turkey and Egypt would contribute for more than 90% of the targeted increases in assets and net profits over the period.

On the longer term, Management is exploring further regional expansion opportunities, including a presence in Sub-Saharan Africa and Latin America, capitalising on its existing turnover in those regions.