ANNUAL REPORT 2016

MANAGEMENT DISCUSSION AND ANALYSIS

4.0. CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Within those persisting challenging conditions, Bank Audi recorded a rather good performance in 2016, despite the depreciation of the Egyptian Pound and the Turkish Lira versus the US Dollar. Consolidated net profits reached USD 470 million, rising by 17% relative to 2015. Net profits growth was supported by a corollary increase in consolidated assets, reaching USD 44.3 billion at end-December 2016. At the current exchange rates, this corresponds to an assets’ increase by USD 2.0 billion relative to end-December 2015, i.e. a growth of 4.7%. Nonetheless, at constant exchange rate (as at end-December 2015), consolidated assets would have increased by USD 6.1 billion, i.e. a growth of 14.4%, thereby justifying the growth in net profits.

4.1. RECENT DEVELOPMENTS AND EXTRAORDINARY REVENUES

In May 2016, the Central Bank of Lebanon, aiming at increasing its FCY reserves, offered local banks the possibility to discount Lebanese Treasury bills with long-term maturities at close to 50% their yields, with a condition that a similar amount is used to buy USD Eurobonds/Central Bank CDs from the Central Bank. Offered for a limited period of time, the exchange operations revolved around a total of USD 14 billion. As a result of the discount, substantial capital gains were realised while the balance sheet of Lebanese banks and their credit profiles were bolstered.

In December 2016, the Central Bank of Lebanon issued the Intermediary Circular No. 446 which provided how the exceptional revenues resulting from those operations should be used, as detailed below:
  • To allocate additional collective provisions corresponding to 2% of risk-weighted loans.
  • To allocate any additional provisions required for the implementation of IFRS 9.
  • To book goodwill impairment.
  • To write off investments in entities abroad.
  • With remainder amounts to be allocated as follows: 70% as reserves for capital increase accounted for as Common Equity Tier 1 capital, and 30% as deferred liabilities accounted for as Tier 2 capital.

Bank Audi was the most active bank in seizing the offered opportunity, (i) first by using its own USD liquidity and holding of LBP-denominated paper and (ii) by channelling USD funds from qualified large depositors overseas (while sharing with them a portion of the generated revenues and retaining the rest as brokerage fee). Bank Audi achieved around USD 1 billion of exceptional non-recurring revenues as a result of its participation in the exchange transactions offered by the Central Bank of Lebanon, representing almost 1/3 of its shareholders’ equity. Those were used as follows:
  • USD 231 million of impairment of goodwill and investments and write-off of intangible assets and one-off expenses.
  • USD 306 million of additional collective provisions corresponding to 2% of risk-weighted loans, so as the total collective provisions reached USD 419 million as at end-December 2016.
  • USD 205 million of write-off of the investments in Bank Audi Syria, Arabeya Online and National Bank of Sudan.
  • USD 108 million of exceptional tax in relation with those bookings.

Having met all the requirements of the Central Bank, the Bank was left with a remainder amount of USD 173 million (USD 204 million before tax) which was allocated over 70% as non-distributable reserves for capital increase (USD 121 million) and 30% as deferred liabilities, which would be accounted as Tier 2 capital (USD 52 million). The USD 173 million are therefore non-distributable reserves meant to strengthen the capital base within the context of higher minimum regulatory requirements.

In sum, the USD 1 billion of exceptional revenues did not impact the consolidated net profits achieved by the Group in 2016, as the related residual exceptional net profits amounted to only USD 5.5 million, out of the USD 470 million generated in 2016.

Meanwhile, the increase in consolidated net profits was generated by all four main developments pillars, with net profits of Bank Audi Egypt and Odea Bank in Turkey contributing most significantly to it. The evolution of asset and loan quality ratios of those entities bear witness to the resilience of their loan books within the prevailing challenging political and economic environment in their countries of presence.

4.2. THE GROUP’S PERFORMANCE IN 2016

The table below sets out the evolution of main activity aggregates over the main development pillars as at end-December 2016 as compared to end-December 2015:

THE GROUP’S PERFORMANCE IN 2016

The following trends drove the Group’s overall performance in 2016:

In Lebanon – The Bank’s Lebanese operations continued to adopt a strategy of consolidating its leading position in the domestic market while capturing growth opportunities, in particular after the recent domestic political settlement fundamentally improving the risk profile of the country and lifting economic opportunities at the horizon. Lebanon remains a pivotal part of the Group’s overall activity. The focus in 2016 was on leveraging existing corporate relationships to grow the Commercial Banking business, and boosting the SME proposition to make it a major business line while increasing the Bank’s penetration of the retail segment within tight efficiency and productivity guidelines. Assets of Lebanese entities (excluding consolidation adjustments) increased by USD 4.0 billion to USD 28.6 billion, driven by a customers’ deposits increase by USD 2.7 billion, reaching USD 21.2 billion, within stable lending. Subsequently, profitability metrics of Lebanese entities improved with the ROAA moving from 0.85% in 2015 to 0.98% in 2016.

In Turkey – The Bank’s Turkish subsidiary, Odea Bank, recorded solid activity growth in 2016, outpacing peers in the Turkish market. Odea Bank reported an assets growth of 18.7% in 2016, as compared to 15.8% for the sector, and is now ranked as the 9th largest commercial bank in Turkey (among 33 non-conventional operating commercial banks) with a market share of approximately 1.4% of total assets (2.0% in deposits and 1.5% in loans). Net profits of Odea Bank increased 3-folds in 2016, from TRY 62.6 million in 2015 to TRY 206.9 million in 2016. This performance was realised within the context of a slight deterioration in the credit quality, with the ratio of NPLs to gross loans reaching 2.57% at end-December 2016, a level which remains well below the market average at 3.2%. The Bank intends to continue to strengthen its position in the Turkish market which continues to be a growth market in spite of the current heightened volatility.

In Egypt – Bank Audi Egypt continues to show strong resilience to the persisting ongoing political uncertainties in Egypt. It continues to sustain a strong growth trajectory in terms of activity and earnings. Assets of Bank Audi Egypt grew in 2016 by 48% reaching EGP 55.8 billion at end-December 2016. At constant exchange rate (as at end-December 2015), assets of Bank Audi Egypt would have grown by 22%. Its net profits increased from EGP 534.9 million in 2015 to EGP 1,709.3 million in 2016, which when adjusted to the gains from the FX structural position since the float of the Egyptian Pounds, becomes EGP 787.9 million. This performance was not realised at the detriment of credit quality as the ratio of NPLs to gross loans was sustained at 1.4%. This result was principally driven by sound credit policies focusing on defensive businesses, as well as by the Bank’s asset and liability management policy which allowed Bank Audi Egypt to take advantage of certain opportunities in 2016.

At the level of the Private Banking activity – The Bank grew its Private Banking operations in 2016, leveraging on existing intra-group synergies and efficiencies as a result of the restructuring of its Private Banking business (pursuant to which its Private Banking entities now form a unified group) and the pooling of resources, in particular in the MENA region. Private Banking client assets rose in 2016 by USD 1.3 billion, from USD 9.8 billion at end-December 2015 to USD 11.1 billion at end-December 2016. In parallel, net profits of Private Banking entities reported a 16% growth, moving from USD 46.9 million in 2015 to USD 54.6 million in 2016.

A detailed discussion of results across main development pillars is included on Page 49.

The performance of each main development pillar individually reflects the Bank’s strong dynamics, including, in particular, its capacity to attract new customers, as well as to expand services provided to existing customers. Both the number of customers and the total number of accounts continued to increase, with 106,641 new customers and 219,639 new accounts in 2016, after the deconsolidation of Bank Audi Syria and National Bank of Sudan, which had total numbers of customers and accounts of respectively 52,272 and 62,527 at end-December 2015. At end-December 2016, Bank Audi had 1,090,541 customers and 2,127,557 accounts in total.

Nonetheless, the performance of the main development pillars individually is unfortunately not mirrored at the consolidated position level, which is significantly impacted by the depreciation of, in particular, the Turkish Lira, the Egyptian Pound and the Euro, as compared to the US Dollar, by 18%, 58% and 3% respectively in 2016.

4.3. CONSOLIDATED BALANCE SHEET MANAGEMENT

Consolidated assets of Bank Audi rose in 2016 from USD 42.3 billion at end-December 2015 to USD 44.3 billion at end-December 2016, corresponding to an increase of USD 2.0 billion, i.e. a growth of 4.7%. Consolidated assets including assets under management, fiduciary deposits and custody accounts reached USD 55.1 billion at end-December 2016 as compared to USD 52.1 billion at end-December 2015, corresponding to a growth by 5.7%.

BALANCE SHEET (USD MILLION)

BALANCE SHEET (USD MILLION)

The contribution of entities outside Lebanon to the Bank’s consolidated total assets decreased from 48.6% as at end-December 2015 to 41.5% as at end-December 2016 as it was adversely affected by the devaluation of the Turkish Lira and the Egyptian Pound. Had the Turkish Lira/US Dollar and Egyptian Pound/US Dollar exchange rates been the same as at end-December 2016 as they were as at end-December 2015, the Bank’s total consolidated assets would have increased by USD 6.1 billion or 14.4%, to USD 48.3 billion as at end-December 2016, primarily due to an increase in assets in Turkey and Egypt by USD 983 million and USD 1,041 million, respectively, on the back of the reported USD 4.0 billion increase in assets of Lebanese entities in 2016.

The following table sets out a geographic breakdown of the Bank’s assets, customers’ deposits and loans as at end-December 2016 as compared to end-December 2015:

BREAKDOWN BY GEOGRAPHY

BREAKDOWN BY GEOGRAPHY

As in previous years, the Bank’s balance sheet continues to favour investments in asset classes which have the highest impact on profitability, while taking into consideration an optimum diversification of risks and a conservative approach to asset quality. Balance sheet allocation is determined by internal limits and regulatory requirements (see section on Risk Management on Page 56). As per the Group’s Corporate Governance guidelines (article 2.8.), limits are subject to annual review by the Board of Directors; in the interim, Management may submit on an ad-hoc basis to the Board of Directors for approval, changes in the limits in response to changing business or market conditions. On a day-to-day basis, the responsibility of monitoring the limits lies within the Group Credit Risk Department.

As at end-December 2016, the Bank’s credit risk profile was as follows: consolidated primary liquidity (excluding certificates of deposits issued by the Central Bank) represented 43.8% of consolidated customers’ deposits (35.5% as at end-December 2015), a high level when compared to regional and global averages. In parallel, the Bank’s loan to deposits ratio stood at 47.9% while portfolio securities as a percentage of total deposits decreased from 28.5% as at end-December 2015 to 27.4% as at end-December 2016. On this backdrop, the Bank’s net exposure to Lebanese sovereign Eurobonds, as a percentage of net customers’ deposits in USD, decreased from 1.5% at end-December 2015 to the insignificant level of 0.03% as at end-December 2016, the lowest level among the Bank’s Lebanese bank peers’ portfolios, according to statistics published by Bankdata.

ASSET ALLOCATION

The following chart displays the allocation by asset class as at end-December 2016 as compared to end-December 2015. The discussion that follows analyses the evolution of the various asset classes and their respective key indicators over the same period.

BREAKDOWN OF ASSETS

Primary Liquidity

The Bank’s primary liquidity is composed of amounts held at the central banks of the countries of presence of the Group, excluding certificates of deposits issued by the Central Bank of Lebanon, placements with banks and loans to banks, and reverse repo facilities with the Central Bank of Lebanon, other central banks, and financial institutions.

Consolidated primary liquidity increased from USD 12.6 billion at end-December 2015 to USD 15.8 billion at end-December 2016, the equivalent of 43.8% of consolidated customers’ deposits (35.5% as at end-December 2015). Including certificates of deposits issued by the Central Bank of Lebanon, consolidated primary liquidity would have increased by USD 5.3 billion in 2016 to USD 21.8 billion as at end-December 2016, accounting for 60.5% of consolidated customers’ deposits as compared to 46.1% as at end-December 2015.

The Bank’s primary liquid assets in Lebanese Pounds are essentially composed of cash and deposits with the Central Bank of Lebanon. Because of the Bank’s participation in the exchange transaction offered by the Central Bank of Lebanon, Bank Audi discounted part of its holdings in securities denominated in Lebanese Pounds, at enticing conditions, translating in an increase in the Bank’s primary liquidity in Lebanese Pounds from USD 880 million at end-December 2015 to USD 3.7 billion at end-December 2016. Subsequently, the ratio of liquid assets in Lebanese Pounds to customers’ deposits in Lebanese Pounds moved from 20.1% as at end-December 2015 to represent 82.5% as at end-December 2016. To absorb this liquidity, the Bank launched, in the third quarter of 2016, a lending program with an envelope of LBP 1 trillion (USD 663 million) aimed at financing SMEs in Lebanese Pounds at an annual rate of 7% the first year (to be compared with an average of c. 12% sector wide). This initiative is expected to be followed by other waves of subsidised loans in Lebanese Pounds, as announced by the Central Bank of Lebanon.

The Bank’s primary liquid assets in foreign currency are essentially composed of cash and short-term deposits placed at the Central Bank of Lebanon and other central banks, excluding certificates of deposits, placements in prime banks in OECD countries, as well as loans to Bank and reverse repo facilities. The Bank’s primary liquidity in foreign currency amounted to USD 12.1 billion as at end-December 2016, increasing from USD 11.8 billion as at end-December 2015. The following table highlights the breakdown of primary liquidity by type and by currency as at end-December 2016:

LIQUIDITY (USD MILLION)

In relative terms, the Bank’s primary liquid assets in foreign currency represented 38.3% of consolidated customers’ deposits in foreign currencies as at end-December 2016, as compared to 37.6% as at end-December 2015. A breakdown of this ratio over the different components shows that primary liquidity in foreign currency comprised principally of placements with central banks in the countries in which the Bank has operations accounted for 27.9% of consolidated customers’ deposits in foreign currency, as compared to 26.7% as at end-December 2015. Placements with OECD banks in foreign currency represented 6.2% of consolidated customers’ deposits in foreign currency as at end-December 2016, increasing from 5.6% as at end December 2015. Loans to banks and reverse repo facilities in foreign currency represented 4.3% of customers’ deposits in foreign currency as at end-December 2016 as compared to 5.4% as at end-December 2015. Such placements are mainly based in low risk OECD and GCC countries that show high levels of solvency and financial and monetary stability. Over 85% of the placements (excluding reverse repo agreements) denominated in foreign currency are held in banks rated A3 or better.

The charts below set out the breakdown of money markets placements held with banks as at end-December 2016 by rating and geographic location:

BREAKDOWN OF PLACEMENTS WITH BANKS

Exposure to other banks is continuously monitored by the Group’s Risk Management Department in close coordination with the Group Financial Institutions and Correspondent Banking Department (“Group FI”). Regular portfolio reviews are conducted throughout the year to assess the Bank’s risk profile and ensure that related positions remain within the overall risk appetite of the Group. During these reviews, specific attention is paid to concentration risk levels to ensure that these remain under control.

Securities’ Portfolio

The Bank securities’ portfolio is composed of Treasury bills denominated in Lebanese Pounds, sovereign bonds denominated in foreign currency (principally US Dollar-denominated Eurobonds issued by the Lebanese Republic), certificates of deposits issued by central banks where the Bank conducts its operations, non-Lebanese sovereign bonds, other fixed income instruments, and equity securities.

The consolidated securities’ portfolio decreased by USD 289 million in 2016, from USD 10.2 billion as at end-December 2015 to USD 9.9 billion as at end-December 2016. As a percentage of total customers’ deposits, the Bank’s securities portfolio represented 27.4% as at end-December 2016 as compared to 28.5% as at end-December 2015.

The following table sets out the distribution of the Bank’s securities portfolio, by type of security, as at end-December 2016 as compared to end-December 2015:

PORTFOLIO SECURITIES BREAKDOWN (USD MILLION)

PORTFOLIO SECURITIES BREAKDOWN (USD MILLION)

Lebanese Bond and Central Bank Certificates of Deposits Portfolio

The composition of the Lebanese portfolio of securities changed in 2016, primarily because of the Bank’s participation in the swap transaction with the Central Bank of Lebanon, as well as prevailing market conditions.

In Lebanese Pounds, certificates of deposits issued by the Central Bank of Lebanon decreased by USD 2.1 billion while holdings of Treasury bills issued by the Republic of Lebanon increased by USD 269 million.

In foreign currency, certificates of deposits issued by the Central Bank of Lebanon increased by USD 4.3 billion in 2016 while the Group’s net exposure to Lebanese sovereign Eurobonds (net of risk-ceded sovereign Eurobonds) was totally wiped out, decreasing from USD 450 million as at end-December 2015 to a mere USD 8.7 million as at end-December 2016. This decrease is in part justified by the significant appetite of foreign institutional investors starting mid-year in investing in Lebanese Eurobonds that are mainly underweight relative to the bond indices (it is estimated that the average weight of Lebanon in emerging markets’ portfolios is around 1% versus EMBI diversified weight of Lebanon of 2.72%). In fact, the trading desk of the Bank achieved a turnover on those instruments of close to USD 6 billion in 2016 as compared to a mere USD 2 billion in 2015.

The Bank’s preference to invest in certificates of deposits issued by the Central Bank of Lebanon stems from the fact that those securities have lower capital consumption requirements (with a 50% risk weighting applied to placements at the Central Bank of Lebanon), as compared to Lebanese sovereign Eurobonds (which carry a risk weighting of 100%) with equivalent yields.

In relative terms, the Bank’s net exposure to sovereign Eurobonds represented 0.1% of the Bank’s total securities portfolio and 0.03% of foreign currency denominated customers’ deposits as at end-December 2016, as compared to 4.4% and 1.5%, respectively as at end-December 2015.

Non-Lebanese Sovereign Securities

The Bank’s non-Lebanese sovereign bonds portfolio is primarily composed of Egyptian and Turkish sovereign bonds, mainly due to the sizeable operations the Group has in those countries through Bank Audi Egypt and Odea Bank. In 2016, the non-Lebanese sovereign bonds portfolio decreased by USD 1.2 billion, from USD 2,540 million as at end-December 2015 to USD 1,342 million as at end-December 2016. The Bank’s exposure to the sovereign risk of Egypt, which is denominated in Egyptian Pounds, decreased by USD 1,027 million to USD 516 million as at end-December 2016. Amid a depreciation of the Egyptian Pounds versus the US Dollar by 58% during the year, USD 890 million of the decrease relates to changes in FX translation, with the real decrease amounting to USD 137 million.

In parallel, the exposure to the sovereign risk of Turkey decreased by USD 140 million, reaching USD 390 million at end-December 2016, with USD 31 million of the decrease accounted for by FX translation impact.

In relative terms, the Bank’s portfolio of non-Lebanese sovereign bonds represented 13.6% of the total securities portfolio and 4.3% of foreign currency denominated customers’ deposits as at end-December 2016, as compared to 25% and 8.1%, respectively, as at end-December 2015.

Other International Fixed Income Securities

As at end-December 2016, the Bank’s exposure to other international fixed income securities almost sustained its level as at end-December 2015, standing at USD 420 million. These placements continue to favour highly rated financial institutions and accounted for 79% of the Bank’s total international bond portfolio as at end-December 2016 as compared to 75% as at end-December 2015. Corporate issuers accounted for 12% and sovereign names (other than local holdings of sovereign securities in Bank Audi’s countries of presence) for 9% of the total at the same date. The relatively high concentration of investments in highly rated financial institutions was mitigated by issuer diversification within the portfolio, as well as the high proportion of relatively short tenor bonds (with maturities under two years), rendering these investments somewhat similar to ordinary placements with banks in terms of implied risk profile and market risk exposure.

In terms of geographical concentration, the Bank’s exposure to other international fixed income securities as at end-December 2016 was split between the GCC markets (accounting for approximately 48% of the total portfolio), the Far East (accounting for approximately 20% of the total portfolio), Europe (accounting for approximately 18% of the total portfolio), the United States (accounting for approximately 10% of the total portfolio) and Australia (accounting for approximately 4% of the total portfolio). Relative to last year, the breakdown by geography favours investments in the Far East and the United States at the detriment of Europe and Australia.

In terms of ratings, the Bank’s international bond portfolio enjoys a high average rating, with the major part of the total exposure being invested in bond issues rated A+ or better. The portfolio is also characterised by a good level of diversification, with the highest single issuer position representing 10% of the total portfolio and the second largest representing 8.6% as at end-December 2016.

Loan Portfolio

The Bank’s loan portfolio consists of direct lending, such as term loans, residential and commercial mortgages and overdrafts. The Bank offers a wide range of traditional banking products and services to large corporate clients, namely working capital finance by way of credit lines, overdraft facilities and short-term loans (with terms of less than one year), and Trade Finance, while also being active in syndications. In addition, the Bank provides support and financing to SMEs and aims to increase the share of SME lending (see section on SME Banking on Page 52). At the retail level, the Group has adopted a customer-centric focused retail model in most of its entities, which continues to boost the contribution of retail lending to the total loan portfolio (see section on Retail Banking on Page 53).

The following is a discussion of the Bank’s loan portfolio and lending activities on a consolidated basis as at end-December 2016 and 2015 (including loans to related parties).

To note that net loans to related parties amounted to USD 145 million as at end-December 2016 as compared to USD 142 million a s at end-December 2015. Article 152 of the Code of Money and Credit and Central Bank Basic Decision No. 7776 dated 21 February 2001, as amended, provides that advances and credit facilities to directors or managers of banks or to companies having common directors with a bank: (i) must be authorised by the shareholders of the bank; (ii) must not exceed in aggregate 5% of the bank’s shareholders’ equity; and (iii) must be made on arms-length commercial terms. Management believes that the Bank is in compliance with applicable regulations.

In 2016, the Bank’s lending activity contracted by 4.0%, with the consolidated net loans portfolio moving from USD 17.9 billion as at end-December 2015 to USD 17.2 billion as at end-December 2016. This performance is without doubt affected by the depreciation of the Egyptian Pound and the Turkish Lira versus the US Dollar. In fact, had the Turkish Lira/US Dollar and Egyptian Pound/US Dollar exchange rates been the same as at end-December 2016 as they were as at end-December 2015, the Bank’s net loans to customers would have increased by USD 1.5 billion (i.e. a growth of +8%), driven by an increase in loans in entities operating in Lebanon, Turkey, Egypt and France, as well as Private Banking entities.

As at end-December 2016, 43.0% of the consolidated net loans were booked in Odea Bank – Turkey, 35.0% in Lebanese entities (including consolidation adjustments), 9.4% in Bank Audi Egypt, 7.1% in Private Banking entities, and 6% in other entities.

Analysis of Loans by Class of Borrower

The following table sets out the distribution of the Bank’s loan portfolio, by class of borrower, as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF NET LOANS & ADVANCES BY TYPE OF CUSTOMER

BREAKDOWN OF NET LOANS & ADVANCES BY TYPE OF CUSTOMER

The distribution of the Bank’s consolidated loan portfolio by borrower continues to indicate a concentration of corporate clients, although decreasing to 60% of the loan portfolio as at end-December 2016, as compared to 64% as at end-December 2015. The decrease was at the advantage of the share of SME clients, which increased from 11.1% as at end-December 2015 to 15.0% as at end-December 2016. The change in the distribution reflects the Bank’s strategy to boost the SMEs lending segment, which it believes constitutes a potential profitable market while offering a greater diversification of risk. Management anticipates that growth of loans to SMEs will be among the key priorities for the Lebanese, Turkish and Egyptian markets in the coming years. Notwithstanding, the Bank will continue to expand its corporate segment targeting established regional companies with turnover exceeding USD 10 million per annum, having sound financial standing, and which are involved primarily in defensive business sectors.

Analysis of Loans by Economic Sector

The following charts sets out the distribution of the Bank’s loan portfolio by economic sector as at end-December 2016 and end-December 2015:

BREAKDOWN OF NET LOANS & ADVANCES BY ECONOMIC SECTOR

BREAKDOWN OF NET LOANS & ADVANCES BY ECONOMIC SECTOR

The distribution of the Bank’s consolidated loan portfolio by economic sector is well diversified with the largest sectors being real estate services & developers (19.8%), consumer loans (17.6%), manufacturing (12.9%), financial intermediaries (12.2%), and wholesale and retail trade (10.4%) as at end-December 2016. This is to be compared with the following distribution as at end-December 2015: real estate services & developers (16.8%), consumer loans (18.1%), manufacturing (16.5%), financial intermediaries (12.0%), and wholesale and retail trade (11.5%). Hence, the most significant change is the drop in the proportion of manufacturing in net loans in favour of real estate services & developers. Notwithstanding, the concentration of the loan portfolio by economic sector remains within the Board of Directors’ approved concentration limits relative to the loan portfolio and the Bank’s consolidated equity.

Analysis of Loans by Maturity

The following charts sets out the maturity profile of the Bank’s loan portfolio as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF NET LOANS & ADVANCES BY MATURITY (USD MILLION)

BREAKDOWN OF NET LOANS & ADVANCES BY MATURITY (USD MILLION)

The Bank’s consolidated loan portfolio was primarily composed of short-term facilities and long-term facilities. Short-term facilities represent the financing of working capital and Trade Finance needs of the Bank’s customer base, and include bridge loans in the process of being converted to medium and long-term tenors upon full withdrawal or ending withdrawal period.

As at end-December 2016, short-term facilities having a maturity of less than one year represented 37% of the Bank’s consolidated loan portfolio, while medium-term facilities with maturities between one and five years represented 17% of the Bank’s consolidated loan portfolio. Loans with maturities over five years represented 45% of the Bank’s consolidated loan portfolio at the same date. There is no significant change in the maturity profile of the loan portfolio as at end-December 2016 as compared to as at end-December 2015. This is primarily attributed to the stability in the maturities’ profile of customers’ deposits. In fact, the relatively stable portion of long-term loans in the portfolio results from the stickiness of the Group’s short-term deposits, whereby short-term deposits are typically rolled over following the expiry of their term, as well as a variety of long-term products offered by the Central Bank of Lebanon, including subsidised and environmental loans.

Analysis of Loans by Currency

The following chart sets out the distribution of the Bank’s loan portfolio by currency as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF NET LOANS & ADVANCES BY CURRENCY (USD MILLION)

BREAKDOWN OF NET LOANS & ADVANCES BY CURRENCY (USD MILLION)

Loans in US Dollars continued to comprise the largest portion of the loan portfolio as at end-December 2016 and 2015, in line with the dollarization rate of the Bank’s balance sheet. The share of loans in Egyptian Pound decreased by 3.5% over the same period, primarily due to the devaluation of the Egyptian Pound against the US Dollar by 58%. The share of loans denominated in Turkish Lira increased by 0.1% as at end-December 2016, as compared to end-December 2015, despite the 18% devaluation of the Turkish Pound against the US Dollar, witnessing clearly to a stronger growth in the Turkish Lira-denominated loan portfolio than the devaluation impact.

Analysis of Loans by Type of Collateral

The following chart sets out the distribution of the Bank’s loan portfolio by type of collateral as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF NET LOANS & ADVANCES BY COLLATERALS (USD MILLION)

BREAKDOWN OF NET LOANS & ADVANCES BY COLLATERALS (USD MILLION)

Although the Bank’s lending decisions rely primarily on the availability and sustainability of cash flows as a first source of repayment, the Bank also relies on the availability and enforceability of collateral. As at end-December 2016, 50% of the consolidated loan portfolio was secured, witnessing to an adequate level of collateralisation. This is to be compared to 45.4% as at end-December 2015. The principal types of collateral securing the Bank’s loans are cash collateral and real estate, in addition to securities such as bonds and shares and bank guarantees. By entity, secured loans represent 48.1% of Odea Bank’s loan portfolio, 55.8% of the loan portfolio of Bank Audi Lebanon, and 23.6% of the loan portfolio of Bank Audi Egypt.

Loan Quality

Lending growth in individual entities was not realised at the detriment of the quality of the loan portfolio. On the contrary, credit quality strengthened in 2016 as Management continued to adopt tight credit risk management policies in the face of the persisting challenging conditions across markets of presence.

Total gross doubtful loans decreased by USD 103 million in 2016, from USD 542 million at end-December 2015 to USD 439 million as at end-December 2016. This decrease was primarily due to an increase in loans written off by USD 199 million, as well as the effect of positive foreign currency translations, transfers to watch list, and the effect of the deconsolidation of Bank Audi Syria and National Bank of Sudan. The latter were offset by new additions by USD 175 million as a result of persisting challenging market conditions, as well as the expected seasoning of Odea Bank’s loan portfolio.

The decrease in gross doubtful loans drove an improvement in the ratio of gross doubtful loans to gross loans ratio from 2.94% as at end-December 2015 to 2.45% as at end-December 2016. Based on published data, this ratio compares favourably to the Bank’s peers in Lebanon (average ratio of 3.5%), regional peers (average ratio of 3.9%), peers in other emerging markets (average ratio of 6.9%), as well as banks in the world (average of 7.5%).

The following table sets out the Bank’s main asset quality indicators as at end-December 2016 as compared to end-December 2015:

ASSET QUALITY (USD MILLION)

ASSET QUALITY (USD MILLION)

In support of its credit quality, the Bank took in 2016 USD 441 million of loan loss provisions, representing 18.9% of total revenues and 2.6% of net loans. USD 306 million of those net loan provisions were collective provisions taken by Management in implementation of the Central Bank of Lebanon’s directives (Intermediary Circular No. 446) so as they would represent 2% of risk-weighted loans. In parallel, the Bank allocated USD 168 million of specific provisions in 2016, offset by USD 33.4 million of recoveries and write-offs.

In absolute terms, the Bank increased its collective provisions from USD 162 million as at end-December 2015 to USD 419 million as at end-December 2016, representing 2.9% of risk-weighted loans and 2.43% of net loans against 0.90% at end-December 2015.

In parallel, specific loan loss reserves, including interest in suspense, decreased from USD 371 million as at end-December 2015 to USD 296 million as at end-December 2016, primarily due to write-offs and negative differences in foreign currency translation, which offset specific loan loss reserves recorded during the year. As a result, the coverage ratio of doubtful loans by specific provisions was sustained at 67.5% as at end-December 2016, almost the same level as at end-December 2015 of 68.4%.

Subsequently, net doubtful loans represented 0.80% of gross loans as at end-December 2016, as compared to 0.93% of gross loans as at end-December 2015.

Gross substandard loans increased from USD 38.1 million as at end-December 2015 to USD 42.6 million as at end-December 2016, driven primarily by a deterioration in certain loans booked in Lebanon. Net substandard loans represented 0.22% of gross loans as at end-December 2016, almost the same level as at end-December 2015, of 0.20%.

FUNDING SOURCES

The following chart sets out the distribution of the Bank’s sources of funding as at end-December 2016 as compared to end-December 2015. The discussion that follows analyses the evolution of those funding classes and their respective key indicators over the same period.

BREAKDOWN OF NET LOANS & ADVANCES BY COLLATERALS (USD MILLION)

BREAKDOWN OF NET LOANS & ADVANCES BY COLLATERALS (USD MILLION)

The Bank’s primary source of funding is customers’ deposits which accounted for 81% of the Bank’s total liabilities and shareholders’ equity as at end-December 2016. Other sources of funding include bank deposits (6.9% of total liabilities and shareholders’ equity), other liabilities (2.1% of total liabilities and shareholders’ equity), subordinated debt (1.5% of total liabilities and shareholders’ equity) and shareholders’ equity (8.4% of total liabilities and shareholders’ equity). Relative to end-December 2015, the proportion of customers’ deposits in total liabilities and shareholders’ equity decreased by 3.0% to the advantage of bank deposits (whose share increased by 2.3%) and shareholders’ equity (whose share rose by 0.6%), with the remainder accounted for by other liabilities (0.2%).

Banks’ Deposits

Banks’ deposits include dues to the Central Bank of Lebanon, dues to other central banks of the countries where the Bank operates, repurchase agreements and dues to banks and financial institutions which include term loans granted from various supranational entities for the purpose of financing SMEs in the private sector at subsidised interest rates.

In 2016, banks’ deposits increased from USD 1.9 billion as at end-December 2015 to USD 3 billion, corresponding to an increase by USD 1.1 billion. Within the context of an increase in due to banks and financial institutions by USD 209 million, this increase is mainly attributed to a short-term credit agreement the Group entered with the Central Bank of Lebanon for a loan facility in the amount of USD 720 million which bears an interest of 6% and matures in March 2017, translating in a reduction of the Group’s net exposure on the Central Bank of Lebanon.

Customers’ Deposits

Consolidated customers’ deposits increased from USD 35.6 billion as at end-December 2015 to USD 36 billion as at end-December 2016, corresponding to an increase of USD 346 million, i.e. a growth by 1%. There is no doubt that this performance was also affected by the depreciation of the Egyptian Pound and the Turkish Lira, since had there been no devaluation of the Turkish Lira (by 18%) and the Egyptian Pound (by 58%) against the US Dollar in 2016, customers’ deposits would have increased by USD 3.6 billion or 10.1%, driven primarily by entities operating in Lebanon, contributing to USD 2.7 billion of this increase.

The stronger growth of customers’ deposits in Lebanese entities and the depreciation of the Turkish Lira and Egyptian Pound significantly impacted the distribution of customers’ deposits over the main development pillars. As at end-December 2016, 58.5% of consolidated customers’ deposits were sourced from Lebanese entities (including consolidation adjustments), 22.9% from Odea Bank, 6.9% from Bank Audi Egypt, 7.1% from Private Banking entities, and 4.6% from other entities. This is to be compared with a contribution of 51.6% for Lebanese entities to consolidated customers’ deposits as at end-December 2015, 24.2% for Odea Bank, 11.6% for Bank Audi Egypt, 7.2% for Private Banking entities, and 5.4% for other entities.

Analysis of Customers’ Deposits by Business Segment

The following table sets out the breakdown of consolidated customers’ deposits over business segments as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF CUSTOMERS’ DEPOSITS BY SEGMENT (USD MILLION)

BREAKDOWN OF CUSTOMERS’ DEPOSITS BY SEGMENT (USD MILLION)

Consolidated customers’ deposits are predominantly composed of personal banking deposits. In 2016, personal banking deposits increased by USD 1.3 billion, from USD 16.1 billion as at end-December 2015 (or 45.3% of total deposits) to USD 17.4 billion (or 48.5% of total deposits) as at end-December 2016.

The increase in personal banking deposits was met by an increase in retail and SME deposits by respectively USD 890 million and USD 256 million over the same period, to account for 24% and 7.8% of total deposits as at end-December 2016. Those increases were totally offset by a decrease in corporate deposits by USD 2.1 billion. Corporate deposits reached USD 6.9 billion as at end-December 2016, accounting for 19.1% of total deposits.

Analysis of Customers’ Deposits by Type

The following table sets out the breakdown of consolidated customers’ deposits by type as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF CUSTOMERS’ DEPOSITS BY TYPE (USD MILLION)

BREAKDOWN OF CUSTOMERS’ DEPOSITS BY TYPE (USD MILLION)

Consolidated customers’ deposits are predominantly composed of time deposits which include saving deposits and certificates of deposits. In 2016, the breakdown of consolidated customers’ deposits by type remained unchanged. Time deposits increased by USD 368 million over the same period, from USD 29.7 billion as at end-December 2015 to USD 30.1 billion as at end-December 2016, accounting for 83.6% of total deposits as compared to 83.4% a at end-December 2015.

In parallel, sight deposits (including margin deposits and other deposits) were sustained at their level of USD 5.9 billion and accounted for 16.4% of total customers’ deposits as at end-December 2016 as compared 16.6% as at end-December 2015.

Analysis of Customers’ Deposits by Maturity

The following table sets out the maturity profile of the Bank’s consolidated customers’ deposits as at end-December 2016 and as at end-December 2015:

BREAKDOWN OF DEPOSITS BY MATURITY (USD MILLION)

BREAKDOWN OF DEPOSITS BY MATURITY (USD MILLION)

The Bank’s deposits are predominantly composed of deposits with maturities of less than one month, accounting for 64.9% of total deposits as at end-December 2016 as compared to 66.8% as at end-December 2015, although displaying historically behavioural stickiness across the past decades, whereby short-term deposits are typically rolled over following the expiry of their term. Nonetheless, in 2016, the maturity profile of deposits has shifted to the advantage of deposits with maturities between 1–5 years, which accounted for 8.0% of total deposits as at end-December 2016 as compared to 2.7% as at end-December 2015. This shift came at the detriment of deposits with 3 months’ maturities accounting for 15.9% of total deposits as at end-December 2016 as compared to 19.9% of total deposits as at end-December 2015.

Analysis of Customers’ Deposits by Currency

The following table sets out the distribution of the Bank’s customers’ deposits by currency as at end-December 2016 as compared to end-December 2015:

BREAKDOWN OF DEPOSITS BY CURRENCY (USD MILLION)

BREAKDOWN OF DEPOSITS BY CURRENCY (USD MILLION)

The Bank’s deposits in US Dollar increased from USD 19.1 billion as at end-December 2015 to USD 21 billion as at end-December 2016, accounting henceforth to 58.5% of total deposits as compared to 53.5% as at end-December 2015. The 4.9% increase in the share of US Dollar was offset by decreasing proportion of deposits in Turkish Lira and Egyptian Pound by respectively 0.7% and 4.1% as a result of the depreciation of the exchange rate of both currencies versus the US Dollar in 2016.

Subordinated Debt

As at end-December 2016, the Bank had four unsecured subordinated loans of an aggregate amount of USD 646 million, or 1.5% of consolidated customers’ deposits.

On 31 October 2014, the Bank extended a subordinated loan to Odea Bank, its wholly-owned subsidiary in Turkey, amounting to USD 150 million, bearing an interest rate of 6.5% and maturing on 30 September 2024. In accordance with applicable BRSA regulations, this loan was treated as Tier 2 capital of Odea Bank and was eliminated on a consolidated level, along with other intra-group adjustments. In the first half of 2015, the Bank securitised this loan (through the issuance of certificates of participation) with third party investors subscribing for USD 138 million (accounted for as consolidated Tier 2 equity in accordance with applicable regulations), Bank Audi Egypt subscribing for USD 8 million, and Audi Capital (KSA) subscribing for USD 4 million.

On 27 March 2014, the Bank entered into subordinated loans with the IFC, a member of the World Bank Group, and the IFC Capitalisation Fund, in an aggregate amount of USD 150 million. The repayment date for the loans is 11 April 2024, subject to early redemption or acceleration (which is, in turn, subject to Central Bank approval). The loans bear interest at a rate of 6.55% over 6-month LIBOR and applicable fees per annum, payable on a bi-annual basis, subject to the availability of free profits in accordance with Central Bank Basic Circular No. 6830, as applicable at the time of entry into the loans.

In September 2013, the Bank issued USD 350 million of subordinated unsecured bonds. The repayment date for the bonds is 16 October 2023, subject to early redemption or acceleration. The bonds carry an annual interest rate of 6.75% payable on a quarterly basis, and are subject to the same conditions, as mentioned above.

The above two issuances are also accounted for as regulatory Tier 2 capital (see Note 37 to the 2016 financial statements for further details).

Shareholders’ Equity

In 2016, the Bank’s shareholders’ equity increased by USD 411 million, from USD 3,287 million as at end-December 2015 to USD 3,698 million as at end-December 2016, the highest in the Lebanese banking sector. As at end-December 2016, consolidated shareholders’ equity represented 8.4% of consolidated assets as compared to 7.8% as at end-December 2015.

The increase in shareholders’ equity by USD 411 million was primarily due to:
  • USD 470 million of net profits realised in 2016.
  • USD 257 million representing the minority share’s proportion of the TRY 1 billion capital increase of Odea Bank closed in August 2016.
  • USD 250 million issuance of Series “I” preferred share closed in December 2016. The purpose of this issuance which was oversubscribed is to replace the Series “E” preferred shares (USD 125 million) redeemed in 2015. It is worth noting that the Series “I” preferred shares is fully compliant with the recent and stricter interpretation of Basel III requirements, particularly at the level of loss absorbency, through a mandatory conversion mechanism triggered by solvency and regulator events, coupled with an option to cancel any dividend distribution on a non-cumulative basis at the sole discretion of the Bank.
  • USD 121 million of increase in non-distributable reserves for capital increase as a result of the allocation, as per the Central Bank of Lebanon’s directives, of 70% surplus of exceptional revenues generated from the swap transaction.

Those amounts were partially offset by:
  • USD 62 million increase of the Bank’s Treasury stock position.
  • USD 183 million of common and preferred dividends distribution in April 2016 for the 2015 exercise.
  • USD 337 million of negative in foreign currency translation reserves.
  • USD 105 million of changes of other components of equity.

In fact, during 2016, foreign currency translation reserves fluctuated as a result of converting the Bank’s investment in its continued subsidiaries from respective functional currencies into Lebanese Pounds (or US Dollars) using the exchange rate at end-December 2016, which differed from the rate in effect as at end-December 2015. During this period, the Egyptian Pound, the Turkish Lira and the Euro were devalued against the US Dollar by 58%, 18% and 3% respectively, resulting in a USD 473 million decrease in foreign currency translation reserves of continued operations. This decrease in foreign currency translation reserves was apportioned mainly among Bank Audi Egypt (USD 318 million) and Odea Bank (USD 171 million), with the balance distributed over the remaining entities outside Lebanon.

In January 2014, the Bank hedged a portion of its capital invested in Odea Bank, which has been converted into Turkish Lira to protect itself against the depreciation of the currency against the US Dollar. The hedging strategies that were entered into were a combination of capped calls and rolling collars which aimed at providing adequate levels of protection while minimising the impact of their cost on the net income of the Bank. As a result, the Bank bore an annual cost of hedge of USD 15.5 million in 2016, as compared to USD 14.7 million in 2015.

In January 2017, following the significant depreciation of the Turkish Lira versus the US Dollar, Bank Audi bought a compound option to hedge an additional portion of its capital at a cost of 2% on the notional amounts, in order to protect itself against further slips in the Turkish Lira. The hedge will be exercised in six months in case TRY has further depreciated by paying an additional premium, otherwise a new hedge would be placed at a lower cost given better market conditions.

In sum, the impact of the Bank’s participation in the swap transactions on the Bank’s consolidated shareholders’ equity as at end-December 2016 as compared to end-December 2015 amounted to USD 200 million.

Capital Adequacy

The Bank’s regulatory capital rose from USD 3,347 million as at end-December 2015 to USD 3,920 million as at end-December 2016, corresponding to an increase by USD 573 million. The increase in regulatory capital is due to the increase in shareholders’ equity mentioned above and to the positive impact of the impairment of goodwill and intangibles assets by respectively USD 129 million and USD 35 million, as well as the increase in Tier 2 capital by USD 52 million following the allocation of 30% of the remainder exceptional, as per the Central Bank of Lebanon’s directives, to deferred liabilities accounted for as Tier 2. Subsequently, the Bank’s participation in the swap operations offered by the Central Bank of Lebanon resulted in bolstering the regulatory capital by USD 426 million, of which USD 380 million at the level of CET1 capital and USD 52 million at the level of Tier 2 capital.

Within this context, in September 2016, the Central Bank of Lebanon issued Intermediary Circular No. 436 by which it amended Basic Circular No. 44 related to the minimum Capital Adequacy Ratios (CAR). These ratios are set to increase gradually between December 2016 and December 2018, to reach 10%, 13% and 15% for CET1, Tier 1 and Total CAR respectively in 2018, including a capital conservation buffer of 4.5%, as set out in the table below:

Capital Adequacy



Based on this circular, the Bank’s capital adequacy ratio was 14.78% as at end-December 2016, as compared to 13.36% as at end-December 2015 in each case, above the regulatory minimum ratio imposed by the Central Bank of 14.0% as at end-December 2016, and 12% as at end-December 2015. Common Equity Tier 1 ratio reached 9.1% as at end-December 2016 as compared to 8.7% as at end-December 2015, each above the imposed minimum regulatory ratio of 8.5% and 8% respectively.

The 1.4% increase in total capital adequacy ratio is broken down over a 0.9% increase in CET1 capital, a 1.2% increase in additional Tier 1 capital as a result of the issuance of Series “I” preferred shares, and the 0.2% aforementioned increase in Tier 2 capital, partly offset by a 5.9% growth in risk-weighted assets including the adverse impact of the downgrade of Turkey’s sovereign rating (-0.9%).

The following table sets out the calculation of the Bank’s capital adequacy ratios as at end-December 2015 and end-December 2016:

CAPITAL ADEQUACY RATIO (USD MILLION)

CAPITAL ADEQUACY RATIO (USD MILLION)



Internal Capital Adequacy Assessment

The Bank conducts yearly Internal Capital Adequacy Assessments (ICAAP) on a consolidated basis and on an individual basis for material entities to ensure that capital levels remain adequate. The Bank views the ICAAP as an important internal initiative rather than just a regulatory one. This is reflected by how the ICAAP has become an integral part of Bank Audi’s decision-making process and an essential tool used by Management and the Board for capital planning. The ICAAP reports for material entities, as well as on a consolidated basis, are prepared annually and submitted to Senior Management, the Board Group Risk Committee and the Board of Directors.

ICAAP also acts as an important exercise that drives the Bank to develop and use better risk measurement techniques. Bank Audi continues to build on the approaches used in previous ICAAP submissions to further develop and refine various risk methodologies and include more sensitive risk measures able to capture risk more adequately. In preparation for moving towards more advanced methods in the Basel framework and for internal use, the Bank calculated credit risk capital charges using the IRB approach for certain asset classes. This approach allows the Bank to measure credit risk and the corresponding capital charge in a more sensitive way than the standardised approach. Bank Audi also continued to improve the stress tests and scenario analyses prepared in the ICAAP, covering a variety of plausible scenarios of different levels of severity.

4.4. RESULTS OF OPERATIONS

Amid the persisting challenging environment across a number of markets of presence, Bank Audi recorded a rather good performance in 2016. Consolidated net profits rose by 17% from USD 403 million in 2015 to USD 470 million in 2016. The 2016 net profits include USD 856 million of exceptional revenues resulting from the exchange transaction of the Central Bank of Lebanon. Nonetheless, as per the Central Bank of Lebanon’s directives, the Bank has used most of these exceptional revenues as follows:
  • USD 231 million of impairment of goodwill and investments and write-off of intangible assets.
  • USD 306 million of additional collective provisions so as to comply with the Central Bank of Lebanon’s directive (Intermediary Circular No. 446) and to arrive to a total collective provisions stock representing 2% of risk-weighted loans.
  • USD 205 million of write-off of the Bank’s investments in Bank Audi Syria, National Bank of Sudan and Arabeya Online. These expenses included USD 136 million of negative changes of foreign currency translation reserves at end-September 2016, which were booked in common equity.
  • USD 108 million of exceptional tax expenses as the above expenses are non-deductible.

Subsequently, the one-off impact of those exceptional flows was limited to a mere USD 5.5 million.

Entities outside Lebanon significantly contributed to the USD 67 million increase in consolidated net profits in 2016, in particular Bank Audi sae (Egypt) and Odea Bank whose net profits increased by USD 91 million and USD 45 million respectively. Lebanese entities had a negative contribution to the increase of consolidated net profits in 2016, justified by the USD 205 million borne by Bank Audi for the write-off of Bank Audi Syria, National Bank of Sudan and Arabeya Online. Excluding the discontinued operations, net profits of Lebanese entities increased by USD 36 million.

The following table sets out an overview of the Bank’s consolidated financial results in 2015 and 2016, with an additional column highlighting those results net of the exceptional flows arising from the BDL transaction, as well as the one-off FX gains on the structural position of Bank Audi Egypt since the float of the Egyptian Pound in September 2016:

INCOME STATEMENT (USD MILLION)

INCOME STATEMENT (USD MILLION)

A detailed analysis of the components of net profits reveals that the increase in net profits (before exceptional items) by USD 61.5 million (i.e. a growth of 15.3%) was driven by a USD 103.5 million increase in total revenues (i.e. a growth by 7.6%) and USD 43.6 million in total costs (i.e. a growth of 4.4%). Total costs include net loan loss provisions, net other provisions, income tax expense and general operating expenses.

The Bank’s consolidated revenues increased from USD 1,366 million in 2015 to USD 2,333 million in 2016, of which USD 616 million of exceptional net fees and commissions, and USD 240 million of exceptional gains on financial instruments, both related to swap transactions. Excluding the latter, total revenues would have reached USD 1,469 million in 2016, increasing by USD 104 million. This increase is driven by USD 107 million of additional interest income within a decrease in non-interest income by USD 3.6 million.

INTEREST INCOME

While the Bank believes that it has the ability to increase net interest income over time, this income may be significantly affected by a variety of factors such as the mix and overall size of the Bank’s earning assets mix and its cost of funding, as well as foreign currency exchange rates. In 2016, net interest income growth was impacted by the persisting low international interest rate environment, as well as by the volatile macroeconomic conditions in the countries where the Bank operates. Net interest income in 2016 did not include any exceptional items from the swap operations.

Despite the prevailing challenging conditions, consolidated interest income, including interest revenues from financial assets at fair value through P&L, increased from USD 892 million in 2015 to USD 999 million in 2016, corresponding to 68% of total revenues (excluding exceptional items), as compared to 65.3% in 2015. The increase in net interest income was primarily due to an improvement in consolidated spread by 20 basis points from 2.14% in 2015 to 2.33% in 2016. Entities in Lebanon and Turkey accounted for 37.8% and 58.4%, respectively, of the total increase in net interest income in 2016. In relative terms, the 20 basis points are contributed by the main development pillars as follows: 7 basis points from Lebanese entities, 12 basis points from Odea Bank, 2 basis points from Private Banking entities with a flat contribution from Bank Audi Egypt, no doubt affected by the FX translation resulting from the depreciation of the Egyptian Pound versus the US Dollar.

NON-INTEREST INCOME

In 2016, consolidated non-interest income increased by USD 861 million, reaching USD 1,335 million, of which USD 616 million of exceptional brokerage fees and commissions generated from the structured product the B ank s old to a number of qualified investors, p rincipally among i ts Private Banking customers, allowing them to participate in the exchange operations of the Central Bank of Lebanon, over and above USD 240 million of exceptional gains on financial instruments related to the swap transaction. Excluding those exceptional commissions and gains, consolidated non-interest income would have reached USD 479 million in 2016 as compared to USD 474 million in 2015, bearing witness to an almost flat performance relative to 2015. At end-December 2016, non-interest income represented 1.19% of average assets, almost the same level as in at end-December 2015, of 1.20%.

COST OF CREDIT

In 2016, the Bank took USD 441 million of net loan loss provision charges, of which USD 306 million in the form of collective provisions and USD 135 million of specific provisions net of recoveries and write-offs. In relative terms, net loan loss provisions represented 18.9% of revenues, while the consolidated cost of risk ratio, calculated as the ratio of net loan loss provision over net loans, increased from 0.7% in 2015 to 2.6% in 2016, largely exceeding the global and MENA region averages of 0.7%.

The allocation of the USD 135 million net specific provisions in 2016 was mostly accounted for by Odea Bank in Turkey, who took USD 93 million, while Lebanese entities took USD 30 million and Bank Audi Egypt USD 13 million. This allocation is consistent with the seasoning of the loan book at Odea Bank, amid an increase in provisioning on the SME portfolio.

In parallel, the allocation of the USD 306 million of collective provisions was apportioned as USD 84 million at Odea Bank, USD 204 million in Lebanese entities, and USD 13 million in Bank Audi Egypt, with other entities accounting for the remainder. Those provisions result exclusively from the exceptional realised capital gains and have been taken in implementation of the Central Bank of Lebanon’s directives (see section entitled “Recent Developments and Extraordinary Revenues” – Page 31). Had there not been any exceptional capital gains, those provisions would not have been needed. Notwithstanding, these provisions may offer Bank Audi (and Odea Bank) a cushion for any future possible risks, and could be used in optimal cases to substitute for future allocations. At end-December 2016, collective provisions reached USD 419 million, representing 2% of risk-weighted loans and 2.43% of net loans against 0.90% at end-December 2015.

TOTAL OPERATING EXPENSES

The Bank’s total operating expenses increased by USD 263 million in 2016, from USD 750 million in 2015 to USD 1,013 million in 2016. Pursuant to its decision not to have exceptional revenues, from the swap transactions, as well as the gains from the FX structural position, impact the consolidated net profits, Management has taken, in 2016, USD 231 million of exceptional expenses, of which USD 129 million to impair the goodwill in a number of entities, USD 15 million for the impairment of intangibles assets, and USD 87 million of other exceptional expenses representing majorly early repayments of IT accruals. Excluding the exceptional expenses, the Bank’s general operating expenses would have increased by USD 32.2 million, corresponding to a growth by 4.3%.

As a result of a faster revenue growth rate than expenses growth rate, the Bank’s cost to income ratio improved from 53.8% in 2015 to 47.0% in 2016 (52% excluding exceptional flows).

INCOME TAX

In 2016, income taxes reached USD 233 million, of which USD 108 million of exceptional taxes relating to the operations with the Central Bank of Lebanon. Excluding the latter, income taxes would have increased from USD 107 million in 2015 to USD 125 million in 2016, rising by USD 18 million or 17%. With operational profits before tax increasing at almost the same pace as income tax, effective tax rate reached 22.3% in 2016, as compared to 22.1% in 2015.

NET PROFITS FROM DISCONTINUED OPERATIONS

In September 2016, the Bank wrote off its investments in Bank Audi Syria, National Bank of Sudan and Arabeya Online, which entailed bearing impairments while realising the related foreign currency translation losses which were already accounted for in common equity (reaching USD 136 million at the time of the write-off). Those impairments reached USD 205 million in 2016, split over USD 103 million impairments for Bank Audi Syria, USD 80 million of National Bank of Sudan (net from gains for its sale), and USD 22 million for Arabeya Online. Nonetheless, those amounts were offset by the net income after tax realised in those entities up till their write-off, reaching USD 28.7 million in 2016 as compared to USD 27.2 million in 2015.

Subsequently, the Bank reported in 2016 net losses from discontinued operations of USD 176.1 million as compared to net profits from discontinued operations of USD 27.2 million in 2015.

COMPONENTS OF ROAA AND ROAE

The Bank’s return on average assets (ROAA) increased from 0.96% as at end-December 2015 to 1.10% as at end-December 2016, primarily reflecting the impact of faster growth in net profits than average assets. In turn, the Bank’s return on average equity (ROAE) increased from 12.47% as at end-December 2015 to 13.91% as at end-December 2016, corresponding to an increase by 1.44%, also justified by a faster growth in net profits than in average equity. In parallel, the Bank’s return on average common equity increased from 13.69% as at end-December 2015 to 14.75%, corresponding to the weighted average cost of the Group. Management’s target remains to achieve a sustainable ROACE across entities, in excess of the cost of equity of the countries where they operate.

The table below sets a breakdown of key performance indicators in 2016 and 2015:

KEY PERFORMANCE METRICS

KEY PERFORMANCE METRICS

EARNINGS PER COMMON SHARE AND COMMON BOOK PER SHARE

As a result of the above, basic earnings per common share increased by 13.4%, from USD 0.92 in 2015 to USD 1.04 in 2016, driven primarily by the growth of net profits across group entities. The graph below sets out the evolution of common earnings per share, including net profits from discontinued operations over the past 5 years.

EARNINGS PER COMMON SHARE GROWTH (USD)

EARNINGS PER COMMON SHARE GROWTH (USD)

The common book per share increased from USD 7.13 in 2015 to USD 7.23 in 2016, corresponding to a growth by 1.5%.

EQUITY METRICS (USD THOUSANDS)

EQUITY METRICS (USD THOUSANDS)

As at 30 December 2016, the ordinary shares were trading on the Beirut Stock Exchange at a market price of USD 6.8 per common share, reflecting a price-to-earnings ratio of 6.5 times and a price-to-book ratio of 0.94 times, both considered as very low multiples with respect to regional peers trading at 11.0 times their common earnings and 1.64 times their common book.

4.5. RESULTS ACROSS MAIN DEVELOPMENT PILLARS

The main development pillars of the Group are its Lebanese operations, its Turkish operations (through Odea Bank), its Egyptian operations (through Bank Audi Egypt) and its Private Banking business. Following a continued growth, Bank Audi’s Lebanese operations continued in 2016 to benefit from a strong leadership across business lines, translating in Bank Audi retaining the highest domestic market shares among direct peers, at an average of 13.0% across main banking criteria (assets, deposits and loans). In Turkey and Egypt, the Bank’s operations have been outperforming their peers. This resulted in Odea Bank ranking, in just 4 years of average activity, 9th among non-state conventional banks, with an average market share improving to 1.6%, while Bank Audi sae (Egypt) ranks 7th among private sector banks, with an average market share increasing to 1.9%.

LEBANESE ENTITIES

In 2016, assets of the Bank’s Lebanese entities (excluding Audi Private Bank and consolidation adjustments) grew by 16.4%, rising by USD 4.0 billion, from USD 24.6 billion at end-December 2015 to USD 28.6 billion at end-December 2016. Assets growth was principally driven by customers’ deposits increasing by USD 2.7 million over the same period, moving from USD 18.5 billion as at end-December 2015 to USD 21.2 billion as at end-December 2016 (a growth of 14.5%). With those results, Bank Audi has outperformed its domestic direct peers in Lebanon, as the Lebanese banking sector achieved an assets and deposits growth of 5.5% and 2.0% respectively in 2016.

LEBANESE ENTITIES (EXCLUDING CONSOLIDATION ADJUSTMENTS)

LEBANESE ENTITIES (EXCLUDING CONSOLIDATION ADJUSTMENTS)

Over the same period, the loan portfolio stabilised at USD 6.0 billion. Nonetheless, this performance in no way reflects a static portfolio as a number of loans totaling USD 1 billion have reached their maturity during the year and were replaced with new ones having an equivalent aggregate amount.

Loan quality improved noticeably in 2016 as the ratio of gross doubtful loans to gross loans of Lebanese entities moved from 4.30% at end-December 2015 to 2.67% as at end-December 2016. This improvement is predominantly justified by the write-off of a facility extended to a regional corporate (USD 115 million). In parallel, coverage ratio by specific provisions also increased from 80.4% as at end-December 2015 to 87% as at end-December 2016, translating in a corollary improvement in the ratio of net doubtful loans to 0.35%, its lowest level since 2009. Coverage by collective provisions was also bolstered from 1.11% of net loans as at end-December 2015 to 4.55% as at end-December 2016.

In 2016, Lebanese entities recorded net profits of USD 75 million after accounting for the net losses from discontinued operations resulting from the write-offs of Bank Audi Syria, National Bank of Sudan and Arabeya Online. Without doubt, the profit and loss statement of Lebanese entities included exceptional revenues and expenses resulting from the Bank’s participation in the swap operations offered by the Central Bank of Lebanon. When normalising the P&L to those exceptional items, Lebanese entities would have generated net profits after taxes and provisions of USD 195 million in 2016 as compared to USD 191 million in 2015, reporting a flat performance.

BANK AUDI EGYPT

In 2016, Bank Audi Egypt succeeded in sustaining a solid growth trajectory, asserting its resilience relative to the prevailing challenging operating conditions marked by monetary and price pressures. In fact, assets of Bank Audi Egypt increased from EGP 37.7 billion as at end-December 2015 to EGP 55.8 billion as at end-December 2016, corresponding to a growth of 48%. Adjusting to the impact of successive devaluations of the Egyptian Pound versus the US dollar in 2016, totaling a value loss by 58%, assets of Bank Audi Egypt would have grown by 22% in real terms. The assets growth mirrors that of deposits, reaching at end-December 2016 EGP 45.9 billion. At the lending side, loans to customers grew in nominal terms by 60.9% (29% in real terms).

This solid growth was not realised at the detriment of credit quality, as the ratio of gross doubtful loans to gross loans sustained its level of 1.4%, largely below that of the sector (5.9%). Coverage by specific provisions continued to represent 75% while the ratio of collective provisions/net loans almost doubled from 0.63% to 1.04%.

BANK AUDI sae (EGYPT)

BANK AUDI sae (EGYPT)

Bank Audi Egypt recorded net profits (after provisions and taxes) of EGP 1,709 million in 2016, including exceptional net gains on the FX structural positions since the float. Adjusting to those gains and to the exceptional expenses taken as a result, Bank Audi Egypt would have reported net profits of EGP 788 million in 2016 as compared to EGP 535 million in 2015.

Based on those adjusted results, Bank Audi Egypt continued to report solid profitability ratio with an ROAA of 1.9% (as compared to 1.5% in 2015) and an ROAE of 20.6% (as compared to 19.8% in 2015). This is to be read in conjunction with a capital adequacy ratio of 14.65% as at end-December 2016, largely exceeding the set regulatory minimum of 10.625%.

ODEA BANK

The year 2016 was marked with heightened volatility in Turkey, in particular since the failed coup attempt mid-year, on the backdrop of geopolitical challenges. Within this context, assets of Odea Bank increased from TRY 32.1 billion as at end-December 2015 to TRY 38.1 billion as at end-December 2016, corresponding to an increase by TRY 6 billion and a growth by 18.8%. The increase was principally funded by an increase in customers’ deposits by TRY 4 billion in 2016, reaching TRY 29.1 billion. In August 2016, Odea Bank had successfully completed a TRY 1 billion capital increase, partially subscribed by the IFC and EBRD, along some private MENA investors, underscoring a strong investor confidence in Odea Bank.

ODEA BANK

In 2016, loans to customers of Odea Bank increased by TRY 4.4 billion from TRY 21.7 billion as at end-December 2015 to TRY 26.1 billion as at end-December 2016, corresponding to a growth by 20%, of which 8% of real growth and the remaining accounted for by the translation effect resulting from the movement of the exchange rate of the Turkish Lira versus the US Dollar over the period.

In terms of loan quality, the ratio of gross doubtful loans to gross loans moved from 2.22% as at end-December 2015 to 2.57% as at end-December 2016, with the deterioration justified by the expected seasoning of the loan portfolio, in particular the SME portfolio. Coverage by specific provisions improved from 38.6% as at end-December 2015 to 43.8% as at end-December 2016, amid adequate collateralisation levels. Collective provisions as a percentage of net loans strengthened from 0.46% as at end-December 2015 to 1.35% as at end-December 2016, as Management decided to allocate the equivalent of USD 84 million as collective provision.

As mentioned earlier, this allocation was made in view of the capital gains Odea Bank realised. Had those gains not been realised, those provisions would not have been needed. Notwithstanding, these provisions, whose allocation was qualified by auditors as not required may offer Odea Bank a cushion for any future possible risks, and could be used in optimal cases to substitute for future allocations.

Based on the above, Odea Bank recorded net profits (after provisions and taxes) of TRY 207 million in 2016 as compared to TRY 63 million in 2015, within the allocation of TRY 534 million to loan loss provision. Subsequently, Odea Bank’s profitability ratios strengthened, realising an ROAA of 0.6% in 2016 (as compared to 0.2% in 2015), while the ROACE increased from 2.7% in 2015 to 7.2% in 2016, in spite of the TRY 1 billion capital increase. The capital adequacy ratio of Odea Bank reached 15% at end-December 2016, exceeding the 12% set regulatory minimum.

PRIVATE BANKING ENTITIES

Bank Audi enjoys a strong expertise and know-how in Private Banking and wealth management. The Bank’s Private Banking entities comprise four main booking centers based in Switzerland (the second largest Arab private bank in Switzerland with an established footprint since the 1970s), Lebanon (representing the largest Private Banking entity in Lebanon), Saudi Arabia and Qatar, with additional representative offices in Monaco, Jordan and the United Arab Emirates. Audi Private Bank also covers Sub-saharan Africa and Latin America through dedicated relationship managers managing assets under management of close to USD 1.2 billion in each of those geographies.

PRIVATE BANKING ENTITIES (EXCLUDING CONSOLIDATION ADJUSTMENTS)

PRIVATE BANKING ENTITIES (EXCLUDING CONSOLIDATION ADJUSTMENTS)

Client assets (comprising of client deposits as well as off-balance sheet AuMs including AuMs, fiduciary deposits and custody accounts) at Audi Private Bank increased from USD 9.8 billion at end-December 2015 to USD 11.1 billion at end-December 2016, representing an increase by USD 1.3 billion, of which USD 269 million in Banque Audi (Suisse), USD 1.2 billion in Audi Private Bank, and USD 7 million in Bank Audi Qatar, partially offset by a small net outflow in Audi Capital KSA. Within this context, the Private Banking entities generated, in 2016, net profits of USD 54.6 million, as compared to USD 46.9 million in 2016, corresponding to a growth by 16%.

4.6. PRINCIPAL BUSINESS ACTIVITIES

COMMERCIAL AND CORPORATE BANKING

Bank Audi provides integrated Corporate and Commercial Banking solutions, with a coverage span entailing the Middle East, GCC, Africa and Europe through its established headquarters in Lebanon and its entities operating in Turkey, Egypt, Jordan, Saudi Arabia, Qatar, Iraq, France, and Switzerland. Despite the continuing challenging economic and political conditions prevailing in several key markets, Bank Audi still managed to consolidate its regional Corporate and Commercial Banking franchise.

Consolidated assets of the corporate and commercial segment reached USD 14.1 billion at end-December 2016. The portfolio witnessed a positive evolution through new lending activity, but the increase was negated by the devaluations of the Egyptian Pound and the Turkish Lira. This resulted in a 3.9% decrease compared to the level achieved at end-December 2015 (USD 14.7 billion). In fact, had the exchange rates of the Egyptian Pound and the Turkish Lira against the US Dollar stayed the same as at end-December 2016 as compared to end-December 2015, net loans of Bank Audi Egypt and Odea Bank would have increased by 29% and 9.6% respectively during 2016.

In Turkey, Bank Audi (via its subsidiary Odea Bank) further initiated and developed relationships with top tier corporate and commercial clients in a wide range of sectors including healthcare and education, construction & real estate, textile and other manufacturing industries, oil and gas, renewable energy, retail and commercial development, tourism, as well as transportation and logistics. The corporate and commercial loan portfolio of Odea Bank stood at USD 6.6 billion as at end-December 2016.

Egypt remains a key pillar of the corporate and commercial lending activity at group level. Bank Audi Egypt’s lending activity covers a wide range of corporations in the fields of infrastructure, power generation, higher education, fertilizer production, oil and gas, real estate development, steel manufacturing, pharmaceuticals, and airlines. The corporate and commercial loan portfolio of Bank Audi Egypt stood at USD 1.3 billion as at end-December 2016.

In Lebanon, Bank Audi continued to support the growth of many local businesses by building a strong relationship with the existing customers and increasing penetration to large corporates. Bank Audi continues to be the largest commercial and corporate lender in the Lebanese sector, with a corporate and commercial loan portfolio standing at USD 4.3 billion at end-December 2016, the same level achieved as at end-December 2015. The flat performance in no way reflects a stagnant portfolio as close to USD 1 billion worth of loans matured during the year and were replaced.

SME Banking

In August 2016, Bank Audi launched a new SME Banking proposition in Lebanon, Egypt and Turkey, encompassing a comprehensive array of products and services, with an ultimate aim for this segment to become a major business line.

In Lebanon, new SME solutions were designed in a flexible manner to better answer customers’ lending and non-lending business needs, from business banking transactions to financing solutions for day-to-day running business needs, as well as business growth and capital expenditure requirements. The revamping of the Bank’s proposition was implemented with the advice of the IFC and aimed at promoting a sector which has a substantial impact on the domestic economy, representing 90% of the enterprises in Lebanon and employing 82% of the work force in the private sector. Hence, serving this sector is not expected to be only profitable for Bank Audi, but it also promotes job creation and economic growth.

The business rationale was based on a number of findings collected from the Bank’s internal data mining, market studies, and focus group research where the main outcome was “Bank Audi would have to rebuild itself according to the business needs of SME clients”. Therefore, the Bank differentiated itself with the design of a total wallet solution aiming at securing a long-term business relationship with the client and a simplified “modus operandi” aiming at optimising efficiency.

During 2016, the Group also continued the implementation of its updated Environmental and Social Management System (ESMS) to actively manage environmental and social risks, and to promote environmental business opportunities (see section entitled “ESMS” on Page 67). Based on the above, the corporate and commercial business generated total revenues of USD 492 million in 2016 as compared to USD 521 million in 2015, corresponding to a decline by 5.6% partly attributable to the devaluations of the Turkish Lira and the Egyptian Pound.

RETAIL BANKING

In 2016, the retail business line reinforced the Bank’s positioning as an innovative and technology-driven retail bank through constant efforts accompanying the roll-out of its business transformation strategy, aiming at becoming a truly customer-centric organisation. New service models and customer segmentation initiatives were implemented across pillar markets, supported by the expansion of delivery channels, the introduction of innovative technologies, and the customisation of existing products and services. Those initiatives aimed at enhancing customer experience, transparency and profitability, improving customer retention while growing the retail lending exposure in compliance with the approved internal risk limits.

The Bank offers more than 150 retail products and services to more than 1 million retail clients across the countries of presence of Bank Audi. The product ranges include conventional checking and savings accounts, fixed-term deposits, loans and residential mortgages, SME lending, credit cards, bank insurance products, as well as a host of innovative retail products developed in association with leading partners across the region. Customers are being served through an Omni-channel network of more than 450 advanced self-service machines (ITM, ATM and Novo), digital channels (online and mobile), and through more than 180 branches.

The retail business line continued to grow in 2016 despite the political and economic instability in the region; when consolidated in USD, retail loans at end-December 2016 sustained the same level as the previous year and stood at USD 3.1 billion, with the flat growth justified by the depreciation of the Egyptian Pound and Turkish Lira versus the US Dollar by respectively 58% and 18% over the same period. In fact, the retail loan portfolio of Bank Audi Egypt reported a growth in local currency by 20.5%, while the retail loan portfolio of Odea Bank reported a growth in local currency by 27.6%. If we exclude the impact of the currency devaluation, the consolidated retail portfolio would have registered a year-on-year growth of 14.6%. This growth is driven by a 23.2% growth in personal loans, 6.8% in car loans, 14.4% in credit cards, and 8.4% in housing loans.

At end-December 2016, housing loans backed by mortgages made up 40.1% of the consolidated retail portfolio, followed by personal loans with 37.6%, credit cards with 13.0%, and car loans with 8.3%, in addition to 1% of small/multipurpose loans.

The retail portfolio quality was preserved in 2016 as the ratio of gross doubtful retail loans to retail loans reached 3.2% at end December 2016 (same level as at end-December 2015), with coverage of those loans by specific provisions increasing to 78.4% (excluding collaterals), while collective provisions represented 2.6% of retail loans.

Based on the above, the Retail Banking business line generated consolidated revenues of USD 331 million in 2016 as compared to USD 279 million in 2015, corresponding to a growth by 19%. The USD 52 million increase in total revenues is mainly attributed to a USD 32 million increase in interest income driven by an improvement in spread following the re-pricing of loans (16% growth), along with a slower increase in non-interest income of USD 21 million. Corresponding nonetheless to a 21% growth, the increase in non-interest income is driven by a 25% increase in commissions from retail business, underscoring increased efficiency at this level.

Bank Audi Lebanon initiated the roll out of a new operating model across the domestic network, based on customer segmentation and channel behaviour analysis. Deeper customer insights catered for an increased marketing focus and tapped into unexploited potential, especially the youth and the public sector.

In August 2016, Bank Audi launched its new Mobile App which was the first stepping stone in the Omni-channel project, offering clients a smooth user experience by allowing them to perform all the banking transactions available on the Internet Banking channel, anywhere and anytime from their mobile devices. The number of transactions on the app have reached 41% of the total banking transactions performed on Audi Online and the Bank Audi App combined.

In December 2016, the number of transactions performed on the Bank Audi App and Audi Online combined constituted 33% of the Bank’s bulk of transfers compared to 22.5% in December 2015. This increase of 9.5% in transactional migration from the counter asserts our clients’ propensity for using alternative delivery channels for simple banking transactions.

At the level of e-Payments and Card Solutions (EPCS), the Bank’s main focus in 2016 was to reinforce its strategy of building a cashless society through encouraging e-commerce and enhancing the contactless payment activity.

In a challenging economic environment, Bank Audi Egypt delivered another year of considerable results, reconfirming its core commitment to achieve a meaningful and efficient customer relationship management in parallel with the development of innovative products and services.

Within that scope, Bank Audi Egypt launched a new Audi Online service in January 2016, and started migrating customers to the new platform and educating them on the new features. Throughout the year, more than 41,000 users (38,127 retail and 3,500 corporate) executed more than 109,000 transactions on the new Audi Online channel. As of Q4 2016, 30% of credit card payments are conducted through alternative channels.

In Turkey, Odea Bank hits record levels, with the number of Retail Banking customers acquired to date (since establishment) exceeding the 1 million customers’ threshold just before the end of 2016, and achieving a year-on-year growth of 34%. Total balances reported, in parallel, a 31% growth over the same period, reaching TRY 20.7 billion, of which TRY 17.8 billion of deposits and investments and TRY 3.5 billion of loans. Increasing focus was on the non-interest income generation in 2016, driven predominantly by the newly implemented infrastructure for commission waiver controls, an increase in number of credit cards (with higher activity), an increase in the number of new consumer loan sales, new mutual funds and investment services, and other new initiatives aimed at generating higher insurance income. As a result, total non-interest income from Retail Banking operations reached a record level of TRY 64 million in 2016.

Direct Banking activities accounted for a significant part of this growth, with a transaction volume growing by 35% in 2016 to TRY 8.7 million, while serving 500k customers and conducting 16 million operations. Monthly Direct Banking transactions constitute 85% of overall banking transactions. Within that scope, the user base of Mobile Banking has rapidly increased, achieving the highest increase in penetration, with a growth of 128% in Q4 2016 relative to the corresponding period of 2015.

In addition to delivering advanced solutions to customers and ensuring that their transactions are carried out quickly and easily, Direct Banking activities also focused on promoting sales. In 2016, 97% of overall cash advance transactions amounting to TRY 257 million were generated by Direct Banking channels, mainly ATM and contact center. The retail loan disbursement service, recently added within Direct Banking, accounted for a volume of TRY 47 million, corresponding to 18% of the total Retail Banking loan disbursement volume at end-December 2016.

PRIVATE BANKING

Bank Audi’s Private Banking arm provides services to high net-worth individuals through its network in Europe (Geneva and Monaco) and the Middle East (Beirut, Riyadh, Abu Dhabi, Amman and Doha), and comprises four main booking entities, namely Audi Private Bank, Banque Audi (Suisse), Bank Audi Qatar and Audi Capital (KSA).

In Lebanon, the Bank provides Private Banking services through Audi Private Bank, the largest Private Banking subsidiary in Lebanon. Audi Private Bank offers a full and diversified range of services to high net-worth clients, with full access to major markets worldwide and global investment products, including discretionary portfolio management, investment advisory and trade execution services in all asset classes, structuring and management of Saudi and regional funds, and other Private Banking services. Its main customers are high net worth individuals in Lebanon, Europe and the Gulf region, as well as the Lebanese diaspora in Sub-saharan Africa and Latin America.

In Switzerland, since 1976, the Bank has been developing an important Private Banking franchise through Banque Audi (Suisse), the second largest Arab private bank in Switzerland. In 2011, the Bank expanded its offering of private wealth management services to Monaco.

In addition, the Bank offers wider coverage of the Private Banking market in the broader MENA region through its entities in Saudi Arabia and Qatar, and its representative office in the United Arab Emirates, offering its clients trading capabilities, advisory services and traditional discretionary portfolio, as well as asset management services. Audi Private Bank also leverages on the presence of the Group in Turkey and Egypt to source customers, while adopting an opportunistic approach in other markets.

Consolidated assets under management (comprising of assets under management, fiduciary deposits and custody accounts) increased from USD 10 billion at end-December 2015 to USD 11 billion at end-December 2016, a level that compares competitively with portfolios managed by regional banks.

In Switzerland, Banque Audi (Suisse) now represents the main Private Banking arm of the Group. With close to USD 6 billion in AuMs, Banque Audi (Suisse) continues to consolidate its leading position as the 2nd largest Arab private bank in Switzerland. In Lebanon, Audi Private Bank is the largest wholly-owned Private Banking entity, with USD 4 billion in AuMs, as compared to approximately USD1 billion for its closest peer. In Saudi Arabia, Audi Capital (KSA) serves as the Group’s main Private Banking hub for GCC markets, with AuMs of USD 1.2 billion.

TREASURY AND CAPITAL MARKETS

The Bank offers Capital Markets and Investment Banking products and services, including securities trading activities. The Bank is leveraging its regional presence to further develop its securities services and brokerage platform, consolidating the business towards increased intra-group synergies.

Since 1996, the Bank has developed a substantial Capital Markets franchise. It is active in the equities markets, as well as in fixed income markets. In Lebanon, the Bank is a market maker on the Beirut Stock Exchange and had a 27% market share of Beirut Stock Exchange equities trading volumes by value as at end-December 2016. The Bank also has a significant share of the government Eurobond and Treasury notes markets, with an annual trading volume exceeding USD 16.7 billion in 2016. In Lebanon and the MENA region, the Bank’s activities are supported by the Bank’s sovereign, fixed income and corporate research coverage businesses.

Through the Bank’s institutional fixed income desk, which was established in 2012, the Bank continues to develop and maintain new and existing coverage of Lebanese securities for international non-bank financial institutions in order to cater to international appetite for higher yielding instruments.

The activities of the Treasury and Capital Markets was marked significantly by the exceptional exchange operations with the Central Bank of Lebanon. Assets of this segment reached USD 24.6 billion as at end-December 2016, from USD 22 billion as at end-December 2015, growing by 19.2%. In parallel, total revenues from those activities moved from USD 412 million in 2015 to USD 1,288 million, of which USD 616 million of exceptional brokerage fees and USD 240 million of exceptional gains on financial instruments resulting from the exchange operations with the Central Bank of Lebanon. Excluding the latter, revenues of the Treasury and Capital Markets activities would have reached USD 432 million, growing year-on-year by 4.9%.