Bank Audi sal : 9M 2021 Interim Report

01

02

BANK AUDI

TABLE OF CONTENTS

MANAGEMENT DISCUSSION	03	ADDRESSES
AND ANALYSIS	5	1.0.	LEBANON
1.0. BASIS OF PRESENTATION	6		Bank Audi sal
	SOLIFAC sal
2.0. OPERATING ENVIRONMENT	6
2.0.	TURKEY
3.0. CONSOLIDATED FINANCIAL CONDITION	7
	Odea Bank A.Ş.
3.1. ASSET ALLOCATION	10
3.0.	CYPRUS
3.2. FUNDING SOURCES	17
	BAPB Holding Limited
3.3. GROUP RESULTS OF OPERATIONS	21
4.0. SWITZERLAND
			Banque Audi (Suisse) SA
		5.0.	SAUDI ARABIA
			Audi Capital (KSA) cjsc
		60.	QATAR
			Bank Audi LLC
		7.0.	FRANCE
			Bank Audi France sa
		8.0. UNITED ARAB EMIRATES
			Bank Audi sal Representative Office

INTERIM CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)	25
INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT	28
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	29
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION	30
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW	31
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY	32
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	34
Notes' Index	35
Notes	36

INTERIM REPORT SEPTEMBER 2021

77

78

78

80

80

80

81

81

81

81

81

81

81

81

81

81

81

81

3

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BANK AUDI

INTERIM REPORT SEPTEMBER 2021

0 1

M A N A G E M E N T D I S C U S S I O N & A N A LYS I S

4

5

MANAGEMENT DISCUSSION & ANALYSIS

BANK AUDI

INTERIM REPORT SEPTEMBER 2021

1.0. BASIS OF PRESENTATION

The following discussion and analysis has been prepared by the Bank's Management based upon the Interim Financial Statements which are included in the following section of this report. The selected financial and operating data set forth below has been subject to rounding, extracted without material adjustment from the Interim Financial Statements. It should be read in conjunction with, and is qualified in its entirety, by the 2020 Annual Report and the Interim Financial Statements in the first 9 months of 2021, including the respective notes thereto.

The Bank's Annual and Interim Financial Statements have been prepared in accordance with standards issued or adopted by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee, the general accounting plan for banks in Lebanon, and the regulations of the Central Bank of Lebanon and the BCC. Such Interim Financial Statements include the results of the Bank and its consolidated subsidiaries as listed in Note

2.2 to the enclosed Interim Financial Statements as at end-September 2021.

The Lebanese political, financial and monetary crisis and its massive uncertainties continue to weigh heavily on the operating conditions of banks in Lebanon, translating into a negative economic environment, deepening recession, hyperinflation and a multitude of exchange rates. As per the World Bank, the financial crisis has reached a point where it could be ranked among the world's three worst crises since the mid-1800s. The Crisis is further exacerbated by the woes of the global economies at large and relating to the volatility in the COVID-19 pandemic, evolving from consecutive lockdowns to relaxing bans, only to face now a resurgence in the number of cases amid the emergence of new COVID-19 strains worldwide, while vaccination levels remain suboptimal. Within this environment, the persisting absence of a clear resolution roadmap for the Lebanese Crisis continues to prevent Management from estimating in a true and fair manner, and as per IFRS, the adverse impact of those matters on the Bank's financial position and equity, which it anticipates to be material. In particular, Management wishes to draw attention to the following key points that carry significant uncertainties with potential material impact on the future financial position of the Bank:

Based on the above, the external auditors expressed an adverse opinion on the 2020 financial statements.

As per regulatory requirements, the Bank maintains its accounts in Lebanese Pounds (LBP). Nonetheless, all figures presented in the following MD&A are expressed in US Dollars ("USD"), unless specifically otherwise stated. The difficulty in accessing foreign currencies has led to the emergence of a parallel market to the official rate of 1,507.5 LBP/USD which deviates significantly from the latter. Also, since April 2020, the Central Bank of Lebanon introduced several rates to be used only in specific circumstances, namely (i) 3,900 USD/LBP as per BdL BC 151, (ii) 12,000 LBP/USD as per BdL BC 158, and (iii) the "Sayrafa" platform rate. For the purpose of this discussion, US Dollar amounts are translated from Lebanese Pounds at the closing of the official rate of exchange published by the Central Bank of Lebanon (1,507.5 as of each of 30 September 2020, 31 December 2020, and 30 September 2021), in line with IAS 21 due to the lack of an alternative legal exchange mechanism. Consequently, the financial statements do not reflect the change of disclosures required by IAS 29 which applies for hyperinflationary economies since the existence of a wide range of FX rates prevailing on the market and the absence of forthcoming revamping of the official peg make it difficult to proceed with such adjustments, especially when it comes to the valuation of monetary assets and liabilities. References to foreign currency translation differences reflect the movement of functional currencies in the countries in which the Bank has a presence against the US Dollar.

2.0. OPERATING ENVIRONMENT

The third quarter of the year has witnessed a relative breakthrough, with the appointment of a new 24-minister Cabinet of a technocrat nature headed by PM Mikati, with the aim of overlooking parliamentary elections, enacting an IMF program, launching long awaited reforms and acquiring international assistance. While the Cabinet formation represents by itself an important breakthrough, after 13 months of standstill, real challenges continue to persist amid structural weaknesses, large financial imbalances and continuing politico-economic uncertainties.

banks' non-resident deposits.

At the monetary level, BdL FX reserves contracted by USD 5.2 billion in the first 9 months amid FX market intervention and import financing for basic products. By the finalisation of this report, Lebanon had removed most of its subsidies on basic imports, leaving a subsidy bill of less than USD 1 billion, against a bill of circa USD 5 billion over the past year. The country got, on 16 September, USD 1,139 million in SDRs (USD 860 million from 2021 IMF distribution and USD 275 million from 2009 distribution). No conditions for reforms are requested under SDR distribution. This directly led to additional reserves at the Central Bank by the same amount. With respect to inflation, the lifting of subsidies is likely to generate an additional price rise of 125% between June 2021 and December 2021, on top of the 314% inflation reported between June 2019 and June 2021.

At the capital markets level, equity markets did not mirror the economic sluggishness of this year. The BSE price index reported an expansion of 43% in the first nine months, driven mainly by the improvement in Solidere prices which rose by 58% over the period, amid the investor tendency to avoid haircuts on their financial placements. This occurred within the context of a 59% annual increase in trading volume, moving from USD 185 million in the first nine months of 2020 to USD 295 million in the 2021 period.

At the banking sector level, the consolidated balance sheet of banks operating in Lebanon suggests a continuing decline in deposits and loans, though at a less significant pace than the year before. Deposits contracted by USD 6.7 billion over the 2021 first nine-month period (-4.8%), against a contraction of USD 16.7 billion during the 2020 nine-month period (-10.5%). Likewise, loans contracted by USD 6.2 billion year-to-date(-17.1%), against a contraction of USD 11.2 billion during the 2020 nine-month period (-22.4%). In parallel, deposit and loan dollarization continued to move in opposite directions, with the deposit dollarization rate reporting a record high of 80.0% while the loan dollarization rate reported a record low of 58.2% as at end-September 2021.

Banking figures also show that deposit interest rates have recorded new historical lows. The LBP deposit interest rate reported a low of 1.53% in

September 2021, against 2.64% at the beginning of the year and a high of 9.40% in November 2019. The USD deposit interest rate reported a low of 0.26% in September 2021, against 0.94% at the beginning of the year and a high of 6.61% in October 2019 at the onset of the Crisis.

In parallel, figures for capital accounts show total shareholders' equity of USD 16.9 billion at end-September 2021, against a total of USD 19.9 billion at end-December 2020. The contraction in equity is tied to losses incurred by banks as a result of noticeable FX costs (rate differential between BdL Circular 151's rate of 3,900 and the official exchange rate of 1,507.5), the effects of mark-ups, the rising operating expenses tied to the surging inflation, in addition to significant provisions to face private and sovereign risks at large.

In sum, it is a pity that when the world in general and our MENA region in particular is recovering from the pandemic contraction of last year to witness healthy positive growth rates this year, Lebanon is witnessing this year another cycle of contraction with corollary financial pressures. The economy has contracted by one third in real terms over a two-year period, resulting in one of the sharpest contractions in GDP per capita worldwide in decades, with huge socio-economic pressures on Lebanese households.

Having said that, the recent formation of the new government gives Lebanon a breath of air. The success of the new Cabinet looking forward depends on the launch of serious structural, fiscal and financial reforms, a full-fledge program with the IMF (with the Fund acting as a watchdog over reform implementation) and the materialisation of international assistance for Lebanon (given the leverage the IMF has over foreign donors at large). In case of an agreement with the IMF, the launch of few serious reforms and securing some international assistance, a return to positive real GDP growth is apt to materialise, benefitting from a low base effect and fully driven by private consumption and investment demand. If Lebanon sees the ratification of an agreement with the IMF, it could pave the way for a material trend reversal for its economy at large and put an end to the huge macro and socioeconomic pressures that were witnessed over the past couple of years.

• The impact of the valuation of assets and liabilities in foreign currencies is expected to be significant once the revamping of the peg is implemented by the Lebanese government, as seems highly likely.
• Loss allowances on assets held at the Central Bank of Lebanon and the portfolio of Lebanese government securities are set at very low levels and considered insufficient given the underlying risks of those assets. Should an adjustment become necessary, the impact is expected to be pervasive.
• A further deterioration of the credit quality of the loan portfolio as a result of the persisting negative economic conditions and the deepening recession, may reveal additional future embedded losses.
• Potential restatement of published financial statements resulting from the use of a functional currency (LBP) related to a hyperinflationary economy as per IAS 29.
• Management has concerns about the effects that the above matters will have on the equity of the Group and the recapitalisation needs that will arise once the necessary adjustments are determined and recorded (please refer to the Bank's 2020 Annual Report for further details).

With respect to the real economy, real GDP is set to contract by 11% in 2021, on the back of a 25% real contraction in 2020. A weak real consumption aggregate is still prevailing (amid the drastic drop in real incomes of households). In parallel, Lebanon is witnessing a quasi-absence of investment, with the investment aggregate at record lows unseen since the civil war. The government spending did not compensate for the lag in private spending given the intense public sector austerity requirements due to fiscal weaknesses.

At the external level, a balance of payments deficit of USD 1.6 billion was reported over the first nine months of 2021, against a deficit of USD 9.6 billion over the same period of last year, suggesting a relatively lower leakage in external accounts when compared to the dramatic drip of last year. This year's balance of payments deficit, calculated as the change in the financial system's net foreign assets over the first nine-month period, comes as a result of a decline in the net foreign assets of BdL of USD 3.7 billion, against a rise in Lebanese banks' net foreign assets of USD 2.1 billion year-to-date. The decline in BdL's net foreign assets, despite September's SDR reception from IMF, is largely attributed to the subsidy policy for basic products, the financing of EdL fuel oil imports and some intervention volumes on the FX market. The increase in banks' net foreign assets is attributed to the rise in banks' liquidity abroad (as a result of banks' compliance with BdL Article 154), in addition to the decline in

3.0. CONSOLIDATED FINANCIAL CONDITION

The Bank operates principally in Lebanon and, accordingly, its financial condition, results of operations and business prospects are closely related to the overall political, social and economic situation in Lebanon, which has been facing a material crisis with unprecedented challenges. The Group also has operations in Turkey, as well as in Europe and a number of countries in the MENA region. Hence, its operating conditions are also affected by the political and economic developments affecting these jurisdictions, and more specifically Turkey accounting for the largest footprint outside Lebanon. On this backdrop, Management has been actively pursuing a new strategic direction focusing on six "going-concern" pillars and aiming at allowing the Group to navigate through the alternating challenges of the upcoming transitory period featuring the implementation of an economic reform plan for Lebanon and evolving regulatory requirements.

This direction encompasses the implementation of the following measures revolving primarily on strengthening the position of the Parent entity in terms of its balance sheet quality, solvency, liquidity and operational performance, while abiding to the regulatory requirements as issued by the Central Bank of Lebanon:

1. Strengthening the foreign currency liquidity (liquidity & ALM)

- A priority goal which Management endeavored to achieve through the implementation of a number of initiatives, the most material of which was the sale of foreign operations in Egypt, Jordan and Iraq, and the strengthening of its equity base among others, allowing to gradually build up the Bank's liquidity starting from a very low base in May 2020. In doing so, the Bank has been taking into account regulatory requirement updates, most notably BdL Basic Circulars 158 & 159, as well as BCC communication 801/13.

BdL Basic Circular 158 (please refer to Note 1 of the attached financial statements) defines a mechanism for the gradual settlement of foreign currency deposits to customers in the amount capped at USD 50,000 over a period of 5 years. As at 9 November 2021, the number of customers reached 13,411 and their corresponding share of eligible funds amounted to USD 177 million, of which USD 44 million represented the outright payment from the Bank's liquidity position when all payments are settled.

6

7

MANAGEMENT DISCUSSION & ANALYSIS

BANK AUDI

INTERIM REPORT SEPTEMBER 2021

BdL Basic Circular 159, issued in August 2021, prevented Lebanese banks from processing foreign currency funds received from customers whether in the form of cash or through offshore transfers at a value other than their face value, with the exception of transactions pertaining to the settlement of loans. It also prevented banks from purchasing foreign currencies at parallel rates with the exception of the purchased foreign currencies duly recorded on the electronic platform and resulting from offshore incoming transfers with the purpose of (i) enhancing liquidity, (ii) engaging in medium or long-term investments, and (iii) settling international commitments. Finally, the circular prevented banks from purchasing bankers' checks and other banks' accounts in foreign currencies whether directly or indirectly.

At the heart of the Bank's foreign currency liquidity lies the restructuring of senior loans extended by international Development Financials Institutions (DFIs). Bank Audi, along with a number of Lebanese banks, initiated discussions with senior lenders in October 2020, revolving around

the requirement of the Central Bank of Lebanon of USD 622 million (representing the required 20% of capital) and raise USD 635 million of which 331 million in fresh dollars. On 7 May 2021, Bank Audi obtained the approval of BdL's Central Council on the 20% capital increase (please refer to Note 1 of the financial statements as at end-September 2021 and the 2020 Annual Report for details).

As at end-September 2021, the consolidated CET1 ratio stood at 10.5% with a Tier 1 ratio of 13.1% and a total capital adequacy ratio of 14.8%, compared to 6.6%, 8.7% and 11.3% respectively as at end-December 2019, within regulatory minima of 4.5%, 6.0% and 8.0% respectively.

3. Asset quality by firming up the de-risking policy with an

active loan deleveraging supported by a centralised and

specialised remedial function to tightly follow up on loan quality

- Management continues to actively sustain its loan deleveraging policy

the buy-back by Bank Audi Lebanon of the participation held by Bank Audi LLC (Qatar) and Bank Audi France sa in Lebanese loans. The Bank adopted, in particular, an updated policy on related-entity transactions encompassing strict rules for entities to remain ring-fenced from potential future crisis spillovers.

Activity Analysis

Consolidated assets of Bank Audi stood at USD 28.0 billion as at end-September 2021, compared to USD 35.4 billion as at end-December 2020, i.e. decreasing by USD 7.5 billion in the first nine months of 2021 or 21.1%. Out of this decrease, USD 6.4 billion relates to the deconsolidation of Bank Audi's entities in Jordan, Iraq and Egypt following the completion of their sale, with a remaining real decrease of USD 1.1 billion decrease, stemming principally from Lebanese entities accounting for USD 0.4 billion of the decrease including

consolidated adjustments, USD 0.5 billion from Odea Bank with the remainder decrease accounted for by other European subsidiaries.

By way of clarification, as at end-December 2020, and in waiting for the completion of the sale transactions agreed on in 2020, the operations sold mentioned above were then treated as discontinued operations and their financials were not reflected in the line-by-line structure of the Statement of Financial Position. Rather, their assets and liabilities were booked under "assets held for sale" and "liabilities held for sale" respectively (sub captions of "other assets and other liabilities" in the Summarised Statement of Financial Position below). In the Income Statement, the net profits generated by those discontinued operations in the first nine months of 2021 were booked under "results from discontinued operations".

a 1 year + 1 year principal deferral on the repayment of the principal while continuing to serve interest payment. In May 2021, in light of the continuing uncertainties of outcome, Management preferred to direct discussions towards a restructuring rather than a deferral, a shift much appreciated by counterparties. The main objective of this restructuring was to: (i) reduce interest charges significantly and (ii) extend the maturity of these facilities to reduce the yearly repayment burden and allow Management to optimise the available free liquidity in foreign currencies. On 13 August 2021, restructuring agreements representing 89% of the Bank's outstanding loan amounts were signed, covering principally an extension of the maturity of each facility by 6 years with zero interest charge and zero restructuring fees. This resulted in a reduction of annual repayments by almost two-thirds with significant interest savings while annihilating any potential legal risk and allowing to sustain healthy and proactive relationships with major DFIs.

As a result, the Bank's level of offshore liquidity free from any obligation to deposits in foreign currencies as at 31 July 2020 increased from 0.93% as at 16 January 2021 to 6.31% as at 30 October 2021 net of fresh payments as per BdL Basic circular 158, largely exceeding the 3% regulatory minimum requirement as per the Central Bank of Lebanon's Basic Circular 154.

initiated in 2017 with a special focus on Stage 2 loans in order to mitigate

the risk of their transfer to Stage 3, increasing collection and proactively

allocating provisions. Consolidated gross loans contracted by USD 974

million in the first nine months of 2021 (-13.6%), with Lebanese entities

accounting for the largest contribution to this contraction with USD 651

million (19.3%), followed by Odea Bank in Turkey with USD 225 million

(8.1%). The contraction of gross loans in Turkey is attributed to an FX

effect following the devaluation of the Turkish Lira versus the US Dollar,

with gross loans increasing in real terms by 2%.

In parallel, consolidated Stage 2 and Stage 3 loans contracted respectively by -19.7% and -22.2% respectively over the same period, representing a decrease by USD 277 million and USD 244 million respectively. As a result, the share of Stage 2 & 3 loans in gross loans decreased by 1.4% and 1.5% respectively over the same period. Meanwhile, coverage of Stage 3 loans improved from 55.3% as at end-December 2020 to 63.4% as at end-September 2021, hovering around 94% when including real guarantees which were recently valued conservatively. In addition, the Bank has excess provisions earmarked for loans of USD 135 million (USD 105 million as at end-December 2020) that it could use as well.

The table below sets out the evolution of the Group's financial position as at end-September 2021 as compared to end-December 2020:

SUMMARISED STATEMENT OF FINANCIAL POSITION

(USD Million)			Change	Change
Dec-20	Sep-21	Sep-21/Dec-20	in %
Cash & placements with banks and central banks	14,540	14,386	-154	-1.1%
Portfolio securities	6,433	6,312	-121	-1.9%
Loans to customers	6,136	5,263	-873	-14.2%
Other assets	7,846	1,564	-6,282	-80.1%
Fixed assets	476	439	-37	-7.8%
Assets= Liabilities + Equity	35,431	27,963	-7,468	-21.1%
Bank deposits	3,677	2,980	-697	-19.0%
Customers' deposits	21,528	20,842	-686	-3.2%
Subordinated debt	797	809	11	1.4%
Other liabilities	6,477	600	-5,877	-90.7%
Shareholders' equity (profit included)	2,951	2,732	-219	-7.4%
AUMs + fid. dep. + cust. acc.	8,752	8,962	210	2.4%
Assets + AUMS	44,183	36,925	-7,258	-16.4%

2. Reinforcing the capital base (solvency) - to maintain sufficient capital buffers over the minimum regulatory capital adequacy levels.

The outset of the Lebanese crisis led to significant ECL impairments mainly on Lebanese banks' holdings of Eurobonds and the lending portfolio, in parallel to a material increase in risk weights on these exposures, along with long-term exposure to the Central Bank of Lebanon. This significantly impacted the capital adequacy ratio with the Bank's CET1 ratio on witnessing the sharpest decline in history from 11.5% as at end- September 2019 to 6.6% as at end-December 2019.

Within this context, the Central Bank of Lebanon issued Intermediary Circular 567 requesting all banks operating in Lebanon to (i) increase the regulatory capital through contributions in foreign currencies, in an amount equivalent to 20% of the Common Equity Tier 1 as at 31 December 2018; and (ii) to cover the capital shortfall, if any, to meet the new minimum required regulatory capital ratios as determined by the circulars of the Central Bank of Lebanon.

Bank Audi, again through a number of initiatives covering an issuance of common share in the first quarter of 2020, the receipt of dividends from foreign entities and the sale of the Bank's operations in Egypt, Jordan and Iraq, and of its investment in Bank Audi Syria, was able to exceed

1. Quality of earning: further rationalising of operating expenses while reinforcing the performance of foreign subsidiaries. Indeed, and due to the severe crisis and ensuing hyperinflationary pressures, Management adopted a cost optimisation policy in Lebanon focusing on: 1) reducing the size of the branch network, 2) relocating employees internally to other branches/services, and 3) facilitating the voluntary departure of staff. 23 branches were temporarily closed in Lebanon from end-September 2019 till end-September 2021, while the head count of Bank Audi Lebanon contracted by 38% over the same period. The related one-time restructuring costs incurred reached USD 32.7 million in the first nine months of 2021.
2. Operational and other non-financial risks: the Bank has been running on crisis management mode to counter the risk arising from the deteriorating economic, political and social environment, as well as from the Beirut Port blast and the COVID-19 pandemic.
3. Governance: the operational consolidation and structure optimisation initiated in 2020 were accompanied by a number of measures aiming at enhancing the group governance framework and further ring-fencing the foreign entities of the Group from the Lebanon risk. These included enhancing the independence of subsidiaries' Boards and adopting additional relevant policies and rules while implementing, in parallel, specific actions including the full margining of the IRS of Odea Bank and

The real contraction of consolidated assets by USD 1.1 billion in the first nine months reveals predominantly a decrease in consolidated deposits by USD 686 million on the funding side (or 3.2%) led mainly by Lebanese entities, met by a decrease in consolidated net loans by 14.2%, underscoring the significant collection efforts undertaken at this level. As at end-September 2021, consolidated customers' deposits reached USD 20.8 billion while consolidated net loans stood at USD 5.3 billion compared to USD 21.6 billion and 6.1 billion respectively as at end-December 2020. The decrease in consolidated customers' deposits in the first nine months of 2021 is totally attributed to Lebanese entities amid a slight increase in entities outside Lebanon, while the former entities account for 34.7% of the decrease in net loans.

1. quarter-to-quarteranalysis reveals stability in consolidated assets and deposits in the third quarter of 2021 whereby they stood at USD 28.0 billion and USD 20.7 billion as at end-June 2021. In parallel, consolidated net loans continued its contractionary trend, declining in the third quarter of 2021 by USD 307 million following a decrease by USD 567 million registered in the first half of the year.

In parallel, consolidated assets under management moved from USD 8.8 billion as at end-December 2020 to USD 9 million as at end-September 2021, increasing by USD 210 million over the first nine of the period. Subsequently, consolidated assets including fiduciary deposits, security accounts and AuMs aggregated to USD 36.9 billion at end-September 2021, compared to USD 44.2 billion as at end-December 2020 and USD 37.0 billion as at end-June 2021, underscoring a stable evolution over the last quarter.

8

9