Bank Audi sal : The Q2 2023 Interim Report

INTERIM FINANCIAL REPORT

END-JUNE 2023

(Unaudited)

Prepared on 24 August 2023

Interim Report March 2023

Table of Contents

Table of Contents

01 Management Discussion and Analysis	5
1.0. Basis of Presentation	6
2.0. Operating Environment	8
3.0. Consolidated Financial Condition	9
3.1. Asset Allocation	13
3.2. Funding Sources	21
3.3. Group Results of Operations	24

02	Financial Statements	29
	Interim Condensed Consolidated Financial Statements (Unaudited)	30
	Interim Condensed Consolidated Income Statement	31
	Interim Condensed Consolidated Statement of Comprehensive Income	32
	Interim Condensed Consolidated Statement of Financial Position	33
	Interim Condensed Consolidated Statement of Changes in Equity	34
	Notes to the Interim Condensed Consolidated Financial Statements	36
	Notes' Index	37
	Notes	38

03	Addresses	85
	1.0.	Lebanon	86
		Bank Audi sal	86
		SOLIFAC sal	88
	2.0.	Turkey	88
		Odea Bank A.Ş.	88
	3.0.	Cyprus	89
		BAPB Holding Limited	89
	4.0.	Switzerland	89
		Banque Audi (Suisse) SA	89
	5.0.	Saudi Arabia	89
		Audi Capital (KSA) cjsc	89
	60.	Qatar	89
		Bank Audi LLC	89
	7.0.	France	89
		Bank Audi France sa	89

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01

MANAGEMENT

DISCUSSION & ANALYSIS

Interim Report June 2023

Management Discussion & Analysis

1.0. Basis of Presentation

In mid-2021, BdL Circular 158 was issued defining the mechanism for the gradual settlement of foreign currency deposits up to an amount of USD 50,000 based on several eligibility criteria. Eligible funds will be

the Attorney General of Lebanon instructed the Prosecutor to stop the investigations and inquiries against the Bank, as well as other banks, until the state prosecution request, filed as a result of her actions,

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 2022 Annual Report (audited) and the Interim Financial Statements in the first half of 2023 (unaudited), 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 (IFRS) Board and interpretations issued by the International Financial Reporting Interpretations (IAS) Committee, the general accounting plan for banks in Lebanon, and the regulations of the Central Bank of Lebanon, the Banking Control Commission (BCC) and Lebanese Capital Market Authority (CMA). Such Interim Financial Statements include the results of the Bank and its consolidated subsidiaries as listed in Note 2.4 to the enclosed Interim Financial Statements as at end-June 2023.

Since late October 2019, Lebanon has been facing a very complex political, financial, economic and monetary crisis unprecedented in scale, which was ranked by the World Bank to be in the top three "most severe crises episodes globally since the mid-nineteenth century". The prolonged inaction by the authorities has exacerbated the fallouts, putting the country in deep recession while severely impacting Lebanese banks' operations and financial standing. National losses have been assessed in 2022 at circa USD 70 billion.

By common local and international consensus, the government of Lebanon needs to adopt and implement a credible and comprehensive macro-financial reform program to address, among others, the systemic failure of the financial and banking sectors caused by this crisis. On 20 May 2022, the Lebanese government adopted a resolution plan led by the IMF and subject to the approval of its Executive Board. It still needs to be ratified by the Lebanese parliament. The plan includes several measures that are prerequisites to unlock funds, that could help pull the country out of a three-year financial meltdown. As of date, the parliament approved the reformed bank secrecy law while remaining measures are still pending.

While not much progress was achieved on those fronts, the IMF issued in March 2023 the concluding statement of its 2023 Article IV Mission. It says Lebanon is at a particularly difficult juncture. For over three years, it has been facing an unprecedented crisis, with severe economic dislocation, a dramatic depreciation of the Lebanese Lira and triple- digit inflation that have had a staggering impact on people's lives and livelihoods. Unemployment and emigration have increased sharply, and poverty is at historically high levels. The provision of basic services like electricity, public health, and public education have been severely disrupted, and essential social support programs and public investment have collapsed. More broadly, capacity in public administration has been critically weakened. Banks are unable to extend credit to the economy and bank deposits are mostly inaccessible to customers. The presence of a large number of refugees exacerbates Lebanon's challenges.

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:

• 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.

Based on the above, the external auditors expressed again an adverse opinion on the 2022 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 ensuing difficulty in accessing foreign currencies led to the emergence of a parallel market to the official exchange rate whereby the price to access foreign currencies has been increasing constantly, deviating significantly from the official exchange rate of LBP 1,507.5/ USD 1 prevailing till end-December 2022. In February 2023, the Central Bank of Lebanon adjusted the official exchange rate from LBP 1,507.5 to LBP 15,000 to the US Dollar. The discrepancy of the market rates relative to the official rate has resulted in an uncontrolled rise in prices and the incessant de facto depreciation of the Lebanese Pound, driving high inflation and an uncontrolled rise in the consumer price index.

The Group uses the official published exchange rates above (1,507.5 as of 31 December 2022 and 15,000 as of 30 June 2023) to translate most balances and transactions in foreign currencies, regardless of their source or nature, in line with IAS 21 due to the lack of an alternative legal exchange mechanism. As per regulatory requirement, some balances are translated based on other exchange rate such as but not limited to the "Sayrafa" rate. 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. Furthermore, the use of different exchange rates renders the comparison of the financial position across period also difficult.

transferred to a subaccount and paid on a monthly basis of USD 400 in cash or equivalent and an amount in LBP equivalent to USD 400 and converted at a rate of USD/LBP 12,000 (before amendment at a rate of USD/LBP 15,000 on 20 January 2023) that will be paid 50% in cash and 50% credited to a payment card. On 5 July 2023, the Central Bank of Lebanon issued Intermediate Circular 674 and introduced several amendments to the Basic Circular 158. First, it cancelled the amount in LBP that clients were able to withdraw on a monthly basis from their foreign currencies accounts opened before October 31, 2019. Second, for the US Dollars portion, the monthly withdrawal remains unchanged at USD 400 per month from the outstanding balance of subaccount opened prior to 1 July 2023 when the client signed the agreement with the Bank based on the aforementioned circular. Third, for all subaccounts created after 30 June 2023, the monthly withdrawal limit is set at USD 300 per month.

Until the above uncertainties are resolved, the Group is continuing its operations as performed since 17 October 2019 and in accordance with the laws and regulations. De facto capital controls and inability to transfer foreign currencies to correspondent banks outside Lebanon are exposing the Group to litigations that are dealt with on a case by case basis when they occur. Management is carefully considering the impact of these litigations and claims. Meanwhile, the Bank believes 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. Due to recent developments and the increasing trend in judgments ruled in favour of the plaintiffs and customers since 2021, Management considers that they may affect negatively the offshore liquidity of the Group, its foreign assets and its foreign currency mismatch in the absence of a capital control law that governs the transfers.

Within the aforementioned litigations of a systemic nature, in

particular, on 22 February 2022, a complaint was filed by a group of lawyers under the name " ماظنلا حلاصإ ديري بعشلا" against

"Lebanese banks" and the chairmen of their boards of directors for alleged committed crimes of tort and fraudulent bankruptcy, money laundering, fraud and breach of trust. Since then, as a result of this complaint, the Public Prosecutor of Appeal in Mount Lebanon judge Ghada Aoun initiated several procedures and issued several decisions in this respect on selected banks, that differ from bank to bank. These included clarification sessions, interrogations, requests of specific data, examination of data by appointed experts, restraining orders, imposing travel bans, preventing disposal of assets… With respect to Bank Audi sal, the Bank, members of its Board of Directors, as well as a number of current/former employees, were the target of restraining orders preventing them from disposing of their assets in addition to accusations of violation of the Bank secrecy law. Bank Audi sal has so far sought diverse legal expertise on the matter: common consensus converges toward the fact that the claims of the Public Prosecutor of Appeal in Mount Lebanon are baseless and with no legal grounds. H.E. the Prime Minister Designate of Lebanon's sent a letter to the Ministry of Interior dated 22 February 2023, requesting H.E the Minister of Interior to instruct all Internal Security Forces - General Directorate not to execute any decision or order by the said Prosecutor in relation with the above accusations. H.E. the Minister of Interior sent such communication on the same date. Furthermore, on 28 February 2023,

has been ruled upon and the decision rendered. On 4 May 2023, a decision was rendered by disciplinary judges in Lebanon to suspend and dismiss the Public Prosecutor of appeal in Mount Lebanon for her services, based on several complaints raised by several parties in claims handled by the latter, noting that the decision is subject to appeal to the Supreme Disciplinary Authority. At present, the case is with the Judge of Instructions, and Management and its legal counsels are in the opinion that the case will be dismissed for the total lack of legal grounds. In addition, the Group may, from time to time, become involved in other legal or arbitration proceedings which may affect its operations and results. In addition, money laundering accusations were recently made against the Chairman and a member of the Board of Directors of the Bank, as well as officers of other Lebanese banks by the same Public Prosecutor of Mount Lebanon who was acting beyond her jurisdiction. The illegality of Prosecutor Ghada Aoun's actions was confirmed by H.E. the Prime Minister Designate of Lebanon in a letter to the Ministry of Interior dated 22 February 2023, denouncing the actions taken by the said Prosecutor in total violation of the law, and requested H.E. the Minister of Interior to instruct all Internal Security Forces - General Directorate not to execute any decision or order made by the Mount Lebanon District Public Prosecutor in relation with the above accusations. H.E. the Minister of Interior has already sent such a communique as requested by H.E. the Prime Minister. Given the fact that the case is now said to be sent to the Judge of Instruction, we hope that the proper proceeding and handling of such case will be followed and will lead to its dismissal for the total lack of legal grounds.

In the midst of the exceptionally difficult economic circumstances and the lack of economically vital decisions by the Lebanese authorities, Bank Audi reiterates its abidance with all regulatory and legal requirements. The Bank also strongly pleas the government of Lebanon to start taking all the necessary steps, starting with the urgent need of a Capital Control law and a comprehensive economic and financial reform plan, as requested by all international concerned bodies, including the IMF and the World Bank, to put a stop to this economic meltdown and to the destruction of its financial system.

In light of the prevailing uncertainties, it remains very difficult to build accurate future plans. Nonetheless, the Group is exerting extended efforts to continuously reinforce its financial standing and strengthening its capitalization and enhancing its ability to withstand additional pressure. The main goal is to position Bank Audi at the forefront of the sector if and when the restructuring and recovery will be upon us.

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Interim Report June 2023

2.0. Operating Environment

Management Discussion & Analysis

Lebanon's Major Economic Indicators

The first half of the year 2023 was characterized by the following trends: -A prolonged political status quo underlined by the postponement of presidential elections amid a continued vacuum since end-October 2022, the limitation of care taker Cabinet meeting on emergency issues and the stalling of the legislative process at the Parliament level

• A slight improvement in real sector performance driven by a mild rise in private consumption while private investment continues to lag behind. The amelioration of the touristic sector in particular provided a support to domestic consumption at large
• A quasi steadiness in monetary conditions since March, translating into a stability in the LBP exchange rate at slightly above LBP/USD 90,000 amid a continuous BdL intervention on the Sayrafa platform
• A worsening of socio-economic pressures on households within the context of a surge in unemployment to above 30% while CPI inflation reached 300% in June, raising cumulative inflation since crisis onset to above 4600%.

A glance on the economic performance of the early months of this year suggests that real sector indicators were at the image of a mixed economy on the overall, though tending to a slight upward correction, mainly in trade and services. Among indicators with positive growth over the first half, we mention the number of passengers at the airport with a rise of 23.2%, the imported freight through BIA with a rise of 11.5% the number of tourists with an increase of 29.0% and the merchandise at the Port with a rise of 1.9% year-on-year. Among indicators with negative growth over the first half, we mention cleared checks with a contraction of 51.3%.

At the external level, the balance of payments recorded a surplus of USD

2023, the equivalent of 42%. Resident deposits contracted by USD 56.9 billion, while non-resident deposits dropped by USD 14.0 billion. FX Deposits contracted by USD 30.7 billion over the period to reach USD

92.9 billion, while LBP deposits rose by LBP 0.1 trillion to reach LBP 67.6

trillion as at end-June 2023. As a result, deposit dollarization went up

from 73.4% in October 2019 to 95.4% in June 2023.

- A cumulative decline in total loans by USD 44.9 billion amid bank

deleveraging efforts: Lebanese banks have been deleveraging

significantly since the onset of the crisis. Their loan portfolio dropped

from USD 54.2 billion to USD 9.3 billion, the equivalent of 82.5%. The

loan redemption represents 63% of the deposit contraction over the

period. FX loans contracted by USD 29.8 billion, while LBP loans dropped

by LBP 10.2 trillion over the period. As a result, loan dollarization went

up from 70.4% in October 2019 to 90.0% in June 2023.

- A cumulative decline in LBP deposit interest rate by 836 basis points and

in USD deposit interest rate by 656 basis points: The average LBP deposit

interest rate dropped from 9.03% at end-October 2019 to 0.67% at

end-June 2023, while the average USD deposit interest rate declined

from 6.61% to 0.05% over the same period. The spread between USD

deposit rate and 3-month Libor reached close to -5.50% in June 2023,

against +4.71% in October 2019.

- A cumulative decline in banks FX liquidity abroad by USD 4.0 billion:

Lebanese banks' claims on non-resident financial sector dropped from

USD 8.4 billion at end-October 2019 to reach USD 4.4 billion at end-

June 2023. This comes as a result of the significant foreign liquidity

usage by Lebanese banks to pay in cash for customers withdrawals at

the beginning of the crisis period and more recently under BdL Article

158. Total beneficiaries so far from BdL Circular 158 amounted to

(USD Million)	2021	2022	1H 2022	1H 2023
Macro economy
Real GDP growth(*)	-7.0%	-2.6%	-2.6%	-0.5%
Monetary sector
Var M3	682	18,900	-6,207	-71,188
Cleared checks	36,418	37,434	16,878	8,212
CPI annual inflation (end-period, %)	283.3%	109.7%	193.7%	300.7%
Public sector
Total gross debt(**)	100,377	101,814	101,724	102,466
Foreign debt(**)	38,515	41,337	39,983	41,574
Domestic debt(**)	61,861	60,477	61,741	60,892
External sector
Imports	13,641	19,054	9,008	-
Exports	3,887	3,493	1,901	-
Trade deficit	9,754	15,561	7,107	-
Balance of payments	-1,960	-3,197	-2,579	1,143
Banking sector(**)
Var: Total assets	-13,219	-5,767	-3,898	-52,625
% change in assets	-7.0%	-3.3%	-2.2%	-31.1%
Var: Total deposits	-9,671	-3,751	-2,298	-28,320
% change in deposits	-7.0%	-2.9%	-1.8%	-22.5%
Var: Total credits	-8,453	-7,664	-3,745	-10,749
% change in credits	-23.4%	-27.7%	-13.5%	-53.6%

(*) Full-year estimate and forecast by the World Bank. (**) January figures for 2023

Sources: World Bank, Central Bank of Lebanon, and concerned public and private entities.

3.0. Consolidated Financial Condition

1.2 billion over the first 5 months of 2023, after a deficit of USD 3.2 billion over full-year 2022. The surplus in the balance of payments over the first 5 months is the result of a USD 0.8 billion contraction of BdL net foreign assets, while banks net foreign assets expanded by USD 2 billion.

The decline in BdL's FX reserves over the first half is mainly the result of BdL intervention on the Sayrafa platform within the context of BdL Circular 161 initiated at 2021 year-end. Within a similar external context, Lebanon's Ministry of Tourism expects about USD 9 billion to be received in 2023 from 2.2 million tourists over the year.

At the capital markets level, equity markets continued the noticeable surge of the past two years. The BSE price index rose by 23.0% in the first half of the year, following a 37.2% increase in the index in 2022, driven by the rise in Solidere shares. This year's rise in prices occurred within the context of a mild 4.9% annual increase in trading volume year-on-year, moving from USD 194 million in the first half of 2022 to USD 204 million in the first half of 2023. In parallel, the turnover ratio (annual trading value to market capitalization) decreased from 2.7% to 2.3% between the two periods.

At the banking level, the cumulative banking sector analysis since the onset of Lebanon's financial crisis, i.e between October 2019 and June 2023, shows the following trends:

• A cumulative decline in total deposits by USD 71.0 billion amid noticeable withdrawals and loan redemption: Customer deposits contracted from
  USD 168.4 billion at end-October 2019 to USD 97.4 billion at end-June

180,976 beneficiary for a total of USD 1,779 million, of which half paid

in USD cash on behalf of BdL and banks (USD 889 million).

- A cumulative decline of USD 12.0 billion in banks Eurobonds portfolio

amid net domestic sales and provisioning: Lebanese banks Eurobond

portfolio reached USD 2.8 billion at end-June 2023, against USD 14.8

billion at end October 2019. The portfolio contraction is tied to banks

net sales of Eurobonds at loss, mainly at the early months of the crisis,

in addition to high provisioning requirements imposed by monetary

authorities on bond portfolios.

- A cumulative decline in shareholders' equity by USD 13.8 billion amid

banks' net losses: Shareholders' equity contracted from USD 20.6 billion

at end-October 2019 to USD 6.8 billion at end-June 2023 as a result of

net bank losses over the period. The losses incurred by Lebanese banks

come as a result of noticeable FX costs, 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.

By the end of the 2023 first half-year, the IMF issued its Article IV Consultation Mission report for Lebanon for the first time since 2019. The report looks quite constructive. On one hand, it describes well the crisis and its outcomes, while fairly outlining responsibilities and challenges. On the other hand, it draws the requirements of a promising way out of the systemic crisis, especially in its recommendations for fiscal policy, monetary policy and banking reforms.

In the first half of 2023, the Bank's consolidated activity and results continue to be severely marked by the persisting heavy challenges prevailing in its 2 main markets of presence: Lebanon and Turkey.

On this backdrop, Management continues to implement its adopted direction axed around the six-going concern pillars which are quite similar to CAMELs criteria identified in the proposed Reform Plan by The IMF to be used for the assessment of viable banks. The main purpose of this direction being to consolidate the financial stranding of the Group and its ability to withstand pressures in its 2 main markets, while positioning the Lebanese entities in the forefront of the Lebanese banking sector post restructuring era to ensure a swift recovery and prompt resumption of normal banking activities.

In Turkey, the first half of 2023 was characterized by the attempt to heal the humanitarian and economic wounds of the earthquake amid an overall tougher global macro environment with persisting high inflationary pressures in different parts of the World. Amid a political atmosphere dominated by election winds in the second quarter, noticeable changes were made in the country's economic management after the government re-election. The new government clearly signals a shift back to orthodox policies. In their early public comments, the new economic team has committed to bringing down inflation, reducing external imbalances and ensuring fiscal discipline. If followed through, the shift towards more orthodox, rules-based and predictable policymaking would bring about less operating volatility allowing institutions to set forth reasonable and credible plans over the short and medium terms. At Odea Bank,

Management adjusted to the current policies as quickly as possible while continuing to closely monitor these sensitive developments. Performance- wise, maintaining adequate liquidity levels, monitoring asset quality, protecting the Bank's capital and improving efficiency remain at the top of priorities. Within this context, Odea Bank achieved good results in the first half of 2023, driven by an operation growth focused on sustainable profitability. Total assets of Odea Bank increased in nominal terms by TRY

1. billion to stand at TRY 73.7 million as at end-June 2023, driven by an increase in customers deposits by TRY 7.3 billion to stand at TRY 56.8 billion. Loans to customers increased by TRY 2 billion to TRY 30.1 billion. This evolution reflects a real increase in loans denominated in TRY by TRY

1. billion within a real decrease in loans denominated in foreign currencies by TRY 4.5 billion. The remaining is accounted for by FX translation effect following the devaluation of the TRY versus the USD from TRY 18.7 per 1 USD as at end-December 2022 to TRY 26.02 per 1 USD as at end-June
   2023. Loan quality continue to improve consistently with the ratio of stage
   3 to gross loan reaching 4.1%as at end-June 2023 compared to 5% as at end-December 2022. Odea Bank posted net profits TRY 1.1 billion in the first half 2023 compared to TRY 343 million in the first half 2022.

Private Banking entities have also reported a good performance in the first half of 2023 reporting net profits of USD 7.6 million compared to USD 6.7 million of net normalised profits in the first half of 2022, net of the effect of the one-off release of provision on RoL instruments sold. This outperformance was driven by an increase in Assets Under Management of private banking entities from USD 3.8 billion as at end-December 2022 to USD 4.7 billion as at end-June 2023.

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