Bank Audi sal : The 2022 Annual Report

Annual Report 2022

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Annual Report 2022

Statement of the Chairman and Group Chief Executive Officer

Dear stakeholders,

2022 was another difficult year for the Group, as significant challenges continue to weigh on the operating conditions of countries of presence, particularly in Lebanon and Turkey, the Group's two principal markets. I will start with Turkey and the performance of Odea Bank before moving on to Lebanon.

In Turkey, increased political and economic volatility triggered a series of measures taken by the government and the Central Bank of Turkey to deal with the financial and currency crisis that have been besetting the country for a couple of years now. The Turkish Lira has depreciated by 28% versus the USD during the year, translating into a material negative translation impact of banking aggregates when measured in USD counter-value. In spite of this challenging environment, our subsidiary Odea Bank posted a resilient performance in 2022, on a stand-alone and in Turkish Lira basis, supported by sustainable results, outpacing the performance of privately-owned deposit Turksih banks. The Bank continued to consolidate its financial position, with the NPL ratio improving to the lowest level achieved since 2018 at 5.0% as at end-December 2022, while posting healthy profitability ratios.

In Lebanon, the continued absence of the reform pack to address the severe impact of the financial crisis prevailing since October 2019 is perpetuating high levels of uncertainities, preventing banks to estimate in a reasonable manner the impact of the Crisis on their financial position, which we anticipate to be quite material.

By common local and international consensus, the reform pack should include:

1. A credible and comprehensive macro-financial reform program to address, among others, the systemic failure of the financial and banking sectors caused by the Crisis.
2. An IMF program that will allow to unlock other international funds.
3. Parliament-approvedCapital Control and banking restructuring and financial rebalancing laws.
4. Filling the governance vacuum (extending to the President, government and other governmental bodies).

So far, an initial draft of the Capital Control law was endorsed in the parliamentary committees and awaits full parliamentary approval. It also remains subject to the approval of banking restructuring and financial rebalancing laws which will be setting conditions for so-called loss allocation criteria, which have not yet to date been formally submitted to parliament.

The Bank supports the agreement with the International Monetary Fund, as well as the adoption of the reform pack, given that the positives outweigh negatives. However, further amendments to the current version of the recovery plan are required to ensure a clear and fair distribution of losses among the concerned parties, and to address other critical points that are necessary to strengthen the financial position of all banks. We also firmly believe that a legislative solution is urgently needed, through the enactment of laws that are appropriate for the adjudication of the unconventional legal disputes arising under the current exceptional circumstances.

Within this unsettling landscape, the year 2022 was another consolidation year for Bank Audi, focusing in priority on reinforcing the Bank's financial standing while promptly adapting to the numerous regulatory changes, mainly in Lebanon and Turkey. We continued implementing the six going concern pillars adopted in 2020, which coincidentally, happen to mirror to a great extent the CAMELS criteria mentioned in the proposed Reform Plan by the IMF, to be used for the assessment of viable banks.

In 2022, a particular focus was put on hedging the Bank's capital and profit and loss statement against the significant devaluation of the LBP. In anticipation of the change of the official exchange rate of the Lebanese Pounds to LBP 15,000 per USD starting 1 February 2023, we started in 2021 to significantly reduce the FX open position to stand at a short position of USD 150 million as at end-December 2022, from a peak of USD 2 billion as at end-December 2020. Nonetheless, this came at a cost of USD 2,873 million (LBP 4,331 billion when translated at the prevailing official exchange rate of LBP 1507.5 per USD) accumulated over the years 2021 and 2022 which could represent, at first glance, a considerable burden on equity. However, if such reduction was not made before the adoption of the new official exchange rate in February 2023, a mark-to market hit at the new official rate would have resulted in a cost higher by 3.15 times reaching LBP 13,668 billion instead of the LBP 4,331 billion actually incurred. The implementation of this direction has also allowed to ensure a better positioning in terms of capital adequacy ratios, reporting significantly higher levels than those that would have been reported without this reduction. CET1, Tier 1 and total capital adequacy ratio stood at 6.33%, 8.86% and 9.81% respectively as at end-December 2022, above the minimum regulatory levels of 5.25%, 6.75% and 8.75% applicable in 2022 (including a capital conservation buffer of 0.75%).

Statement of the Chairman and Group Chief Executive Officer

The new market realities in Lebanon have also driven us to rethink the business model of Bank Audi Lebanon to support the quality of its earnings by optimising sources of revenues and promoting the resilience of its infrastructrure, ensuring service continuity. We endeavoured to develop our capacity for generating core earnings in international "fresh dollars" by actively promoting the Account in fresh US Dollars. Nevertheless, that was not enough since the Bank's operation in Lebanon has decreased by 80% and its income by 63% over the past 3 years, while its number of customers decreased by only 17%, implying a large clientele base that generates negligible income. These aforementioned changes in the demographic of the customer base dictated the optimisation of the operating model whereby traditional banking would focus primarily on high and medium net worth customers, as well as corporate and commercial clients. In line with global trends, the remaining customers, of which mass and millennials, would be ultimately migrated to a new operating model based on the "neo" scheme which offers a compelling Digital Banking proposition at low cost. This should provide mutual benefits for the customer and bank alike, namely improving customer experience, capitalising on the payroll and mass market, scaling the acquisition of new clients, reducing dependency to physical network, reducing fraud risk, and promoting financial inclusion.

On the Information Technology level, the Bank devised to transform the IT department into an independent IT service provider company - Infostructure sal -, a subsidiary fully owned by the Bank Audi group, while laying out the required resources for Infostructure to rebuild its human capital. The principal aim of this reorganisation is to ensure a business continuity to all the bank's users and clients alike, along its customary level of service excellence, irrespective of the conditions in the operating background. In 2022, Infostructure set the grounds for several initiatives to be implemented in 2023, namely sustaining the availability and security of its services and maintaining its infrastructure and platforms. Migrating the Bank's business users to Office 365 on the cloud, consolidating some business applications in such a way as to maintain full business functionalities while reducing their operational cost, and a total revamp of the Bank's document management system are examples of such initiatives. IT also worked, in 2022, on the renewal of the Bank's Compliance solutions, in line with the Central Bank of Lebanon's circulars and regulatory requirements.

Notwithstanding, the year 2022 was not all gloomy, as the end of the year was also marked by a couple of positive prospects, namely:

• The adoption by the Lebanese parliament, on 18 October 2022, of law 306, effectively modifying the 66 year-old banking secrecy law, a motion requested in the proposed reform plan by the IMF.
• The execution, on 7 October 2022, of the maritime border demarcation agreement between Israel and Lebanon, which was followed by the announcement, on 12 December 2022, by Total Energies of the launch of drilling operations in Block 9 during the first quarter of 2023.
• A gradual recovery of Electricité Du Liban as highlighted by the unveiling, in the fourth quarter of 2022, by the Ministry of Energy of the recruitment process for the selection of Board members of the Electricity Regulatory Authority, which is also on the IMF's reform plan agenda, and the subsequent implementation, starting November 2022, new increased tariffs (for the first time since 1994).

Those developments, amid persisting significant challenges, allow for hope of a recovery on the medium to long term. Building cautiously on that hope, we are currently actively working on identifying the most salient strategic opportunities and challenges going forward for the Bank in Lebanon in the prevailing tough operating environment, as well as in a post-recovery setting. The ultimate goal consists in positioning the Bank to weather the prevailing Crisis in the best possible shape and to be ready to efficiently resume activity growth and business expansion as and when the challenges alleviate.

In closing and on behalf of the Board of Directors, we would like to thank our customers for their continuous patience and understanding, our employees for their exemplary dedication, and our shareholders for their permanent support. We all look forward for better days ahead.

Samir N. Hanna

Chairman and Group CEO

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Annual Report 2022

Bank Audi at a Glance

Bank Audi at a Glance

USD 26.9

billion

Total assets

USD 7.6 billion

of assets under management underscoring the importance of the Private Banking business line

USD 3.9	USD 19.4
billion	billion
Total loans to	Total customers'
customers	deposits

192	504,000
Years of banking	Customers served through 112
experience	branches and 3,059 employees

Main Financial Indicators 2022
	2018	2019	2020	2021	2022	CAGR 18-22
Assets	47,201(3)	39,535	35,431	26,857	26,926	-13.09%
Loans to customers	13,267	10,350	6,136	4,743	3,937	-26.19%
Customers' deposits	31,956	29,594	21,528	20,101	19,381	-11.75%
Shareholders' equity	3,886	2,970	2,951	2,492	4,017	0.83%
Net earnings	501	-602	-145	-184	-435	-
Number of branches	201	213	125(4)	115	112	-13.60%
Number of staff	6,306	6,288	3,931	3,180	3,059	-16.54%
Placements and loan quality
Placements with Central Bank and banks(1)/Deposits	100.44%	89.44%	97.42%	100.12%	88.58%
Loans to deposits	41.52%	34.97%	28.50%	23.59%	20.32%
Credit-impaired/Gross loans(2)	5.52%	13.12%	15.31%	13.33%	14.78%
Loan loss provisions/Credit-impaired					88.27%
(including allowance for ECL Stages 1 & 2)	102.82%	85.28%	94.46%	115.06%
Loan loss provisions/Credit-impaired (including real					103.59%
guarantees and allowance for ECL Stages 1 & 2)	146.72%	145.05%	158.41%	141.16%
Net credit-impaired/Equity	7.40%	19.98%	16.65%	9.98%	4.96%
Allowance for ECL Stages 1 & 2/Net loans	2.33%	3.56%	7.02%	7.61%	3.07%
Capital adequacy
Equity/Assets	8.23%	7.51%	8.33%	9.28%	14.92%
Common equity Tier 1 ratio	11.37%	6.61%	9.36%	10.04%	6.33%
Capital adequacy ratio	18.91%	11.33%	13.12%	14.52%	9.81%
Profitability
Cost to income	46.27%	45.72%	44.22%	40.71%	48.97%
ROAA	1.12%	-
ROACE	14.00%	-

1. Including CDs.
2. After adoption of IFRS 9.
3. Consolidated assets of Bank Audi would have reached USD 42.3 billion as at end-December 2018, after netting for comparison purposes.
4. Excluding entities held for sale.

USD 731	USD 4.0
billion
million
Total
Net profits
shareholders'
in 2022(1)
equity

Common Earnings Per Share	Revenues & Net Earnings
(USD)	(USD Million)

1.31

1,494	1,525
	1,370

1.22

1.24

1,253

1,034

7	ESMS	GRI Standards
Different countries	Environmental and Social	Pioneering the reporting
of presence	Management System integrated	standards in the MENA region
	into core credit decision since 2013

1.15 1.11

2018

2019(1)

2020(1)

2021(1)

2022(1)

1. Adjusted to the one-off flows from the outset of the financial crisis in Lebanon.

											609			775	731
501	489
2018		2019(1)				2020(1)				2021(1)		2022(1)

Total revenues		Net earnings

1. Adjusted to the one-off flows from the outset of the financial crisis in Lebanon.

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Annual Report 2022

Table of Contents

Statement of the Chairman and Group Chief Executive Officer	4
Financial Highlights	6

01 Corporate Governance	10
1.0.	Corporate Governance Framework	12
2.0.	Shareholding Structure	13
3.0.	Corporate Structure	14
4.0.	Group High Level Chart	15
5.0.	Board of Directors	16
6.0.	Biographies of Board Members	18
7.0.	Remuneration Policy and Practices	22

02	Management Discussion and Analysis	24
	1.0. Overview of Bank Audi sal	26
	2.0. Strategy	27
	3.0. Operating Environment	29
	4.0. Consolidated Financial Condition and Results of Operations	30
		4.1. Business Overview in 2022	30
		4.2. Consolidated Financial Overview in 2022	34
		4.3. Results of Operations	51
		4.4. Results across Main Development Pillars	56
		4.5. Principal Business Activities	59
	5.0.	Earnings Allocation	63
	6.0.	Risk Management	63
		6.1. Evolution of the Group's Risk Management Framework	64
		6.2. Priorities for 2023	65
		6.3. Credit Risk	65
		6.4. ALM and Liquidity Risk Management	66
		6.5. Non-financial Risks	67
	7.0.	Deployed Resources	68
		7.1. Information Technology	68
		7.2. Human Resources Development	68
	8.0.	Compliance	70
	9.0.	Corporate Social Responsibility	70

Table of Contents

03	Financial Statements	74
	Resolutions Proposed by the Board of Directors to the Annual General Assembly of Shareholders	76
	Auditors' Report	77
	Consolidated Income Statement	84
	Consolidated Statement of Comprehensive Income	85
	Consolidated Statement of Financial Position	86
	Consolidated Statement of Cash Flow	87
	Consolidated Statement of Changes in Equity	88
	Notes to the Consolidated Financial Statements	90
	Notes' Index	91
	Notes	92

04 Management	208
1.0. Group and Bank Audi sal Management	210
Lebanon	210
2.0. Entities' Management	212
2.1. Odea Bank A.Ş. - Turkey	212
2.2. BAPB Holding Limited - Cyprus	213
2.2.1. Banque Audi (Suisse) SA - Switzerland	214
2.2.2. Audi Capital (KSA) cjsc - Kingdom of Saudi Arabia	215
2.3. Other Entities	216
2.3.1. Bank Audi LLC - Qatar	216
2.3.2. Bank Audi France sa - France	217
2.3.3. SOLIFAC sal - Lebanon	218

05	Addresses	220
	1.0.	Lebanon	222
		Bank Audi sal	222
		SOLIFAC sal	224
	2.0.	Turkey	224
		Odea Bank A.Ş.	224
	3.0.	Cyprus	225
		BAPB Holding Limited	225
	4.0.	Switzerland	225
		Banque Audi (Suisse) SA	225
	5.0.	Saudi Arabia	225
		Audi Capital (KSA) cjsc	225
	60.	Qatar	225
		Bank Audi LLC	225
	7.0.	France	225
		Bank Audi France sa	225

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