Bank Audi sal : Interim H1-2021 (1643 KB)

BANK AUDI

INTERIM REPORT JUNE 2021

INTERIM

FINANCIAL

REPORT

END-JUNE 2021

(Unaudited)

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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	9
3.0.	CYPRUS
3.2. FUNDING SOURCES	16
	BAPB Holding Limited
3.3. GROUP RESULTS OF OPERATIONS	19
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)	23
INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT	26
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	27
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION	28
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW	29
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY	30
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	32
Notes' Index	33
Notes	34

INTERIM REPORT JUNE 2021

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CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BANK AUDI

INTERIM REPORT JUNE 2021

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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

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MANAGEMENT DISCUSSION & ANALYSIS

BANK AUDI

INTERIM REPORT JUNE 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 half 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 to the enclosed Interim Financial Statements as at end-June 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

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 USD/LBP 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 USD/LBP 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 June 2020,

31 December 2020, and 30 June 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.

The evolution of real sector indicators this year is actually a mirror image of a sluggish economy. The BdL average coincident indicator, a weighted average of a number of real sector indicators, reported a contraction of 44.1% in the first two months of 2021 relative to the same period of 2020. Among indicators with negative growth over the first half of this year, we mention the merchandise at the Port with a contraction of 70.8%, new car sales with a decline of 49.0%, cement deliveries with a decline of 33.3%, and the value of cleared checks with a drop of 22.1%. Indicators with positive growth were construction permits with a surge of 326.6%, the value of property sales with an increase of 59.0% year-on-year, and the number of passengers at the airport with a rise of 19.0% year-on-year.

At the monetary level, the year 2021 has witnessed erratic fluctuations of the Lebanese Pound exchange rate on the black market. The behaviour of the exchange rate of the Lebanese Pound is the result of a combination of psychological factors related to domestic confidence and fundamental factors related to the demand and supply of Lebanese Pounds and US Dollars on the market. Subsequently, the year-on-year Consumer Price Index surged by 149% in May 2021 compared to results of May 2020 as per the Consultation and Research Institute. BdL FX reserves contracted by USD 3.5 billion in the first half of 2021 amid FX market intervention, and import financing for basic products. In parallel, Parliament approved a law to distribute prepaid cards valued at a yearly total of USD 556 million,

an average of USD 93 per household per month for 500 thousand eligible households, parallel to potential subsidy rationalisation.

At the capital markets level, equity markets did not mirror the economic sluggishness of the first half year. The BSE price index reported an expansion of 30% in the first half of the year, driven mainly by the improvement in Solidere prices which rose by 35% over the period, amid the investor tendency to avoid haircuts on their financial placements. This occurred within the context of a 57.4% annual increase in trading volume year-on-year, moving from USD 119 million in the first half of 2020 to USD 188 million in the first half of 2021.

Finally, banking sector statistics for the first five months of 2021 suggest a continuing contraction in activity this year, though much less significant than that of the corresponding period of last year. In fact, measured by the aggregated assets of operating banks in Lebanon, banking activity contracted by USD 4.7 billion in the 2021 year-to-May period (the equivalent of -2.5%), against a contraction of USD 12.9 billion over the same period of 2020 (the equivalent of -6.0%). Banks' shareholders' equity amounted to USD 17.0 billion at end-May 2021, against USD 19.9 billion at end-2020 and USD 20.7 billion at end-2019. The contraction in shareholders' equity is tied to the accumulation of bank losses, despite cost control efforts, amid significant provisioning requirements facing Lebanese banks, covering both sovereign and private sector risks at large.

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 deafening 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:

• 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).

2.0. OPERATING ENVIRONMENT

The Bank operates principally in Lebanon. Turkey, home of Odea Bank, represents the other significant market of presence of the Group. Accordingly, its financial condition, results of operations and business prospects are closely related to the overall political, social and economic situation in Lebanon and to lesser extend in Turkey. What follows is a short analysis of the operating environment in Lebanon in the first half of 2021.

The first half of 2021 was marked by a volatility in the pandemic, with the first quarter reporting a rise in COVID cases in Lebanon generating consecutive lockdowns, while the second quarter reported a sharp decline in cases and deaths, leading to a number of countries removing their travel bans with Lebanon. Yet the third quarter started with a resurgence in the number of cases amid the emergence of new Corona strains worldwide, while vaccination has exceeded 22% of Lebanon's population so far.

The analysis of major macroeconomic aggregates this year suggests that private consumption has been adversely impacted by overall economic concerns, in addition to the adverse impact of the Coronavirus pandemic on the consumption behaviour. Private investment got a significant hit amid lack of economic appetite and growing concerns on the politico-economic outlook of the country at large.

Almost all sectors have witnessed a further contraction in the first half of 2021 relative to the 2020 period, amid domestic political bickering, rising macroeconomic uncertainties and ascending monetary fears. The tourism and real estate sectors seem to be the only sectors regaining some strength this year amid cheap domestic prices and global travel opening up, with property sales and passengers at the airport up by double-digits this year.

3.0. CONSOLIDATED FINANCIAL CONDITION

The uncertainties stemming from the unprecedented challenges of the Lebanese Crisis marked the Group's operating conditions in the first half of 2021, in addition to the adverse political and economic developments affecting more specifically Turkey, exacerbated by the outbreak of the COVID-19 pandemic worldwide. On this backdrop, Management has been actively pursuing the implementation of a number of measures aiming at reinforcing the Bank's financial standing while de-risking foreign entities from Lebanon spillover effects.

Those measures are inherent to an adopted broader direction focusing on six "going-concern" pillars as follows :

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

- in line with the Central Bank of Lebanon's Basic Circular 154 requiring Lebanese banks to ensure a ratio of offshore liquidity free from any obligation (liquidity abroad), exceeding 3% of their total deposits in foreign currencies on 31 July 2020. As a result of a number of initiatives implemented by the Bank, of which the largest contributor being the proceeds from the sale of foreign operations, Bank Audi's offshore liquidity ratio stood at 6% as at end-June 2021 compared to 0.93% as at 16 January 2021. Currently, the Bank is working on managing the impact of the BdL Basic Circular 158 (please refer to Note 1 of the attached financial statements) and streamline the related processes to be ready when the said circular enters into effect. So far, the impact of the said circular on the Bank's liquidity in foreign currencies amounts to USD 107 million in the first year if all eligible customers express their intention to benefit from this circular, reaching USD 342 million over the 5-year period. The Bank's direction consists of multiplying initiatives aiming at accumulating liquidity buffers. In doing so, the Bank will be taking into account regulatory updates as issued by the Central Bank of Lebanon. On 17 August 2021 and effective that date, BdL issued Basic Circular 159 which prevented banks from processing foreign currency funds received from customers, whether in the form of cash or through offshore transfers at a value other than its 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 purchase 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.

Restructuring of senior loans - Optimising further the management of foreign currency liquidity.

The outset of the Lebanese Crisis has materially impacted the international liquidity of Lebanese banks at large, which has led a number of those banks having lines with senior lenders to request a deferral on the repayment of the principal. Bank Audi was no different, initiating discussions with senior lenders in October 2020 revolving around a 1 year + 1 year principal deferral 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 the 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 were signed with Development Financial Institutions (DFIs) representing 89% of the Bank's outstanding loan amounts, 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 for sustaining healthy and proactive relationships with major DFIs.

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MANAGEMENT DISCUSSION & ANALYSIS

BANK AUDI

INTERIM REPORT JUNE 2021

2. Reinforcing the capital base (solvency) - to maintain sufficient capital buffers over the minimum regulatory capital adequacy levels and in line with Central Bank of Lebanon's 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 minimum required regulatory capital ratios as determined by the circulars of the Central Bank of Lebanon. 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, Bank Audi was able to exceed 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-June 2021 and the 2020 Annual Report for details).

The above translated in a consolidated CET1 ratio of 10.0% with a Tier 1 ratio of 12.6% and a total capital adequacy ratio of 14.3% as at end-June 2021, compared to 9.4%, 11.5% and 13.1% respectively as at end-December 2020, 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 - In view of the negative economic outlook and the deepening of the recession in Lebanon, Management has toughened, in the first half of 2021, same as in 2020, its loan deleveraging policy 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. The loan credit function was hence mostly concentrated around the activity of a decentralised and specialszed remedial function amid a direction to fully allocate all operating surplus to provisions until the dissipation of the prevailing uncertainties in Lebanon. Consolidated gross loans contracted by USD 636 million in the first half of 2021 (8.9%), driven principally by a contraction of gross loans of Lebanese entities by USD 444 million (-13.1%) and a decrease in Odea Bank by USD 130 million (-4.7%), stemming mostly from an FX effect following the devaluation of the Turkish Lira versus the US Dollar. In parallel, Stage 2 and Stage 3 loans improved by -14.1% and -14.9% respectively over the same period, representing a decrease by USD 198 million and USD 164 million respectively. As a result, the share of Stage 1 loans in gross loans improved by 2.1%, from 65.1% at end-December 2020 to 67.2% as at end-June 2021, mirroring a decrease in the share of Stage 2 loans in gross loans by 1.1% and of Stage 3 loans by 1% over the same period. Meanwhile, coverage of Stage 3 loans improved from 55.3% as at end-December 2020 to 62.5% as at end-June 2021, while the Bank relies on real guarantees representing 65% of Stage 3 loans to provide a comfortable buffer in case of further deterioration. In addition, the Bank has excess provisions earmarked for loans of USD 108 million (USD 105 million as at end-December 2020) that it could use as well.

1. Quality of earning: further rationalising of operating expenses while reinforcing the performance of foreign subsidiaries. Indeed, and in common with entities operating in severe crisis mode under hyperinflationary pressures, Management adopted a cost optimisation policy in Lebanon focusing on: 1) reducing the size of the branch network with the temporary closure of 21 branches since September 2019 till end-June 2021, 2) relocating employees internally to other branches/ services, and 3) facilitating the voluntary departure of staff reducing head count by 38% over the same period, albeit while incurring a one-off cost USD 67 million.
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, the Beirut Port blast and the COVID-19 pandemic.

6.Governance: a number of measure were implemented during the course of the first half of 2021 aiming at enhancing its governance structure. On the backdrop of the operations consolidation and organisation structure optimisation measures undertaken in 2020, these cover the strict ring fencing of its remaining foreign entities from Lebanon risk (fully margining of IRS of Odea Bank and buy-back by Bank Audi Lebanon of loans participation of Ban Audi LLC (Qatar) and Bank Audi France), whilst improving transparency and independence of local decision. Within that scope, Management formulated an internal policy on related entity transactions encompassing strict rules for entities to remain ring-fenced from potential future crisis spillovers.

Based on the above, consolidated assets of Bank Audi contracted by 21% in the first half of 2021, from USD 35.4 billion as at end-December 2020 to USD 28.0 billion as at end-June 2021. This contraction principally mirrors the deconsolidation of Bank Audi's entities in Jordan, Iraq and Egypt following the completion of their sale. As at end-December 2020, and in waiting for the completion of the transactions agreed on in 2020, those operations 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 half of 2021 were booked under "results from discontinued operations".

Adjusting to the USD 6.4 billion of assets related to discontinued operations, consolidated assets would have moved from USD 29 million as at end-December 2020 to USD 28.0 billion as at end-June 2021, implying a decrease by USD 1.0 billion, of which USD 0.4 billion in Lebanese entities including consolidated adjustments, USD 0.5 billion in Odea Bank with the remainder decrease accounted for by other European subsidiaries.

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

SUMMARISED STATEMENT OF FINANCIAL POSITION

(USD Million)			Vol.
Dec-20	Jun-21	Jun-21/Dec-20	%
Cash & placements with banks and central banks	14,540	14,238	-301	-2.1%
Portfolio securities	6,433	6,264	-169	-2.6%
Loans to customers	6,136	5,570	-567	-9.2%
Other assets	7,846	1,482	-6,365	-81.1%
Fixed assets	476	451	-25	-5.2%
Assets= Liabilities + Equity	35,431	28,005	-7,426	-21.0%
Bank deposits	3,677	3,018		-17.9%
-659
Customers' deposits	21,528	20,702	-826	-3.8%
Subordinated debt	797	805	8	0.9%
Other liabilities	6,477	729	-5,748	-88.7%
Shareholders' equity (profit included)	2,951	2,751	-200	-6.8%
AUMs + fid. dep. + cust. acc.	8,752	8,991	239	2.7%
Assets + AUMS	44,183	36,996	-7,187	-16.3%

An activity breakdown by geography as at end-June 2021 reveals a	represented 29.3%, compared to 28.4% as at end-December 2020,
predominance of Lebanese entities and Turkish operations. 69.8% of	while those entities account for 61.1% of consolidated net loans, of which
consolidated assets were generated by entities operating in Lebanon	43.1% contributed by Odea Bank in Turkey and 15.9% by operations in
versus 30.2% from entities abroad, of which 17.8% from Odea Bank	Europe. The following table sets out a breakdown of the Bank's assets,
and 11.7% from entities operating in Europe. At the same date, the	customers' deposits and loans, by geography, as at the dates indicated:
contribution of entities abroad to consolidated customers' deposits

BREAKDOWN BY GEOGRAPHY

		Assets			Deposits			Loans
	Dec-20	Jun-21	Change	Dec-20	Jun-21	Change	Dec-20	Jun-21	Change
By region
Lebanon	56.2%	69.8%	13.6%	71.6%	70.7%	-0.8%	41.5%	38.9%	-2.7%
Abroad	43.8%	30.2%	-13.6%	28.4%	29.3%	0.8%	58.5%	61.1%	2.7%

In parallel, consolidated assets under management increased by	USD 36.9 billion at end-June 2021, compared to USD 44.2 billion as at
USD 239 million over the first half of the year, translating in consolidated	end-December 2020.
assets, including fiduciary deposits, security accounts and AuMs of

3.1. ASSET ALLOCATION

A comparative analysis of the consolidated assets allocation as at end-June 2021 compared to end-December 2020 is shown in the table below:

ASSETS BREAKDOWN

	Dec-20		Jun-21
(USD Million)	Vol.	%	Vol.	%
Cash & placements with banks and central banks	14,540	41.0%	14,238	50.8%
Portfolio securities	6,433	18.2%	6,264	22.4%
Net loans	6,136	17.3%	5,570	19.9%
Other assets	7,846	22.1%	1,482	5.3%
Fixed assets	476	1.3%	451	1.6%
Total assets	35,431	100%	28,005	100%

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