Capital Intelligence (CI), the international credit rating agency, has affirmed Bank Audi SAL's (Audi) Financial Strength Rating (FSR) at 'BBB-'. The bank's Foreign Currency (FC) Long- and Short-Term Ratings are both affirmed at 'B', constrained by the Sovereign Ratings of Lebanon. Given Audi's systemic importance and Banque du Liban's (BdL) record of assisting banks the Support Level is affirmed at '3', reflecting the high likelihood of official support in case of need. The Outlook on all Ratings remains 'Stable'.
The FSR reflects Audi's strong franchise and international footprint, good asset quality, resilient net interest margin and comfortable liquidity, the latter subject to systemic risks. The FSR is constrained by concentration to Lebanon sovereign debt and related interest rate and maturity mismatches, the domestic and regional political environment and slow economic growth in Lebanon. The relatively low Common Equity Tier 1 (CET1) ratio and the marked decline in operating and net profit are also constraining factors. CI notes that at the current level, the bank's FSR is likely to come under downward pressure unless the CET1 ratio and profitability metrics improve.
Audi achieved strong volume growth in both loans and deposits at 'Odeabank' – its Turkish subsidiary and now Audi's second largest regional franchise. Overall growth in loans and deposits was also supported by better than expected performance in Egypt, at the same time that Audi continued to scale down its operations in Syria and carefully manage its exposures across MENA.
Despite a rise in non-performing loans (NPLs), Audi maintains a good quality loan portfolio, diversified geographically and across customer and industry sectors. Although NPLs rose, sustained growth in gross loans produced an improved NPL ratio, while loan loss reserve (LLR) coverage has fallen due to write-offs and a decrease in loan-loss provisions. Although LLR coverage remains adequate given the profile of the loan portfolio, going forward, a higher level of precautionary provisioning seems necessary to cover the cost of risk in Turkey – where the loan portfolio is still unseasoned.
A large drop in trading securities income largely offset a healthy rise in net interest income in 2013, with start-up costs in Turkey negatively impacting operating profit and returns. Both net profit and return on average assets therefore experienced a sharp decrease. Operating profit is expected to rebound in the current year as asset utilisation in Turkey and cost efficiency across the Group both improve.
The capital base was increased through Additional Tier 1 funds ($100 million net increase of non-cumulative preferred share capital) and a new $350 million Tier 2 subordinated loan, but regulatory capital increased moderately due to the impact of translation losses, while risk weighted assets expanded significantly due to the build-up of the loan portfolio in Turkey. As a result, although all capital ratios remain comfortably above the regulatory minima, the CET1 ratio is now a little weak. An additional $150 million of Tier 2 Capital obtained from the IFC in March 2014 has since improved the total capital adequacy ratio (CAR).
Liquidity remains comfortable, although ratios tightened as the bank expanded its loan portfolio. As is the case with other Lebanese banks, liquidity must be viewed in light of the systemic liquidity and interest rate risks which are characteristic of the Lebanese banking system. Sovereign debt metrics continued to weaken, but are mitigated by the country's external liquidity which remains robust. The security situation in Lebanon has improved since the new Government was appointed in February. However, any political risk event in the region threatening stability within Lebanon could adversely affect banking system deposit growth and refinancing of public sector debt.
With end 2013 total assets of $36.2 billion, Bank Audi is the largest Lebanese bank. The bank's shareholder base comprises members of the families that founded the bank, as well as other Lebanese and Arab nationals. As a result of growth in both its domestic market and in its international operations, Audi is now a regional universal bank with a leading position in Lebanon, an established presence in Europe and a wide MENA and Turkey footprint. The bank's expansion strategy continues to aim at diversifying its business franchise and profitability within the geographic context, at the same time that it consolidates and strengthens its domestic leadership in Lebanon.