Current price*: USD 1.82 Target price: USD 2.47 Recommendation: Key performance indicators:

Transcription

1 Byblos Bank Equity Research July 23 rd 2009 Sector: Banking Country: Lebanon Current price*: USD 1.82 Target price: USD 2.7 Recommendation: BUY Share data Listing: Beirut Stock Exchange Listing GDRs: London Stock Exchange Reuters code: BYB.BY, BYBPT.BY, BYBQ.L Bloomberg code: BYB.LB, BYBPT.LB, BYB.LI Market cap: USD mn Number of common shares: mn Number of priority shares: mn Share price information* YTD r +13.8% 1M r +2.2% 3M r +11.0% 12M r -31.6% 52 Wk range USD Byblos common shares performance USD Jul 08 Sep 08 Nov 08 Jan 09 Mar 09 May 09 Jul 09 A key domestic player with regional footprints A strong domestic presence focused on traditional banking Based on organic growth and strategic acquisitions, Byblos Bank emerged as a major player in the Lebanese banking sector. Today it operates a network of 76 branches in Lebanon and ranks third among its peers. It has maintained a traditional banking profile, retaining a focus on retail, commercial and trade finance activities. A regional expansion revolving around trade finance Beyond its historical presence in Europe, Byblos Bank has stepped up its expansion effort into the Middle East since 2003, targeting high-growth markets with underdeveloped banking activity markets where it can benefit from significant trade finance activity and considerable trade flows with Lebanon. We expect Byblos Bank to witness sustained but slower growth and liquidity levels to remain high After having registered a significant growth in all its major indicators in, namely a growth rate of 18.5%, 15.3%, and 2.8% in assets, deposits and loans respectively, we have taken a conservative approach based on slower growth rates over the projection period. However, we expect Byblos Bank s bottom line to grow significantly while sustaining high liquidity and sound level of capitalization. We value Byblos at USD 2.7 per share Our fair value estimate, derived from the DECF projections equals to USD 2.7 per share, implying a P/B 09 of 1.38 and a P/E 09 of 8.0. We, accordingly, assign a buy recommendation to Byblos Bank. Key performance indicators: 2010e 2011e 2012e 2013e * Byblos Bank common shares closing as of the 23 rd of July 2009 This report should be read in conjunction with the Lebanese banking sector review. - Net Interest Income (USD mn) - Non-Interest Income (USD mn) - Net Profit (USD mn) - ROaA - ROaE - BVPS (USD) - EPS (USD) - P/E - P/BV % 13.% % 12.7% % 13.2% % 1.1% % 15.2% % 16.1% Contacts Head of Research and Advisory: Marwan Salem m.salem@ffaprivatebank.com Sales and Trading, FFA Private Bank (Beirut) Sales and Trading, FFA Dubai ltd (DIFC) Disclaimer This document has been issued by FFA Private Bank for informational purposes only. This document is not an offer or a solicitation to buy or sell the securities mentioned. This document was prepared by FFA Private Bank from sources it believes to be reliable. FFA Private Bank makes no guarantee or warranty to the accuracy and thoroughness of the information mentioned, and accepts no responsibility or liability for damages incurred as a result of opinions formed and decisions made based on information presented in this document. All opinions expressed herein are subject to change without prior notice.

2 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 Contents Investment Summary 2 Company Overview - Brief background - Capital increase and shares listing 5 - Ownership structure 6 - Corporate structure 6 - Business lines 7 - Geographical coverage 10 - Strategy 1 - SWOT analysis 16 - Latest developments 17 Financial Highlights and Forecasts 18 - Source of funds 18 - Uses of funds and asset allocation 19 - NPLs and provisions 21 - Net interest income 21 - Non-interest income 23 - Returns 2 - Efficiency 2 Valuation 26 - Valuation methodology 26 - Discount rate calculation 26 - Fair value estimate and recommendation 27 Financial Statements 28 - Balance sheet 28 - Income statement 28 - KPIs and key ratios 29

3 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 2 Investment Summary Based on more than 50 years of growth and strategic acquisitions, Byblos Bank emerged as a major player in the Lebanese banking sector. Today it operates a network of 76 branches in Lebanon and has operations in 10 countries across Europe and the MENA region. In contrast with its most prominent competitors (Bank Audi and Blom Bank), Byblos Bank has maintained a more traditional banking profile, retaining a focus on retail, commercial and trade finance activities. However the Bank is also active in other lines of business including insurance, brokerage and research services. Byblos Bank embarked on a geographical expansion in the mid-1970s to mitigate the surge in domestic risk following the start of the civil war. As a result, the Bank has been present in Europe since 1976 after establishing a sister bank in Brussels (1976) and branches in Paris (1980), London (1981) and Limassol/Cyprus (198). In recent years, the Bank has undertaken a number of steps to expand its business and improve its market share and profile by setting up subsidiaries in key MENA countries. In, 22.% of the Bank s total assets and 20.1% of its net income were derived from outside Lebanon (including international activities booked in Lebanon) compared to 12.1% and 2.1% respectively in 200. The Bank s corporate strategy is focused on creating value for its shareholders through continued domestic and regional growth, geographic and product diversification, operational efficiency, cost containment and optimizing its capital structure. In line with the overall performance of the Lebanese banking sector in, Byblos Bank reported a significant growth in all its major indicators. It registered 18.% growth in assets, 15.1% growth in customer deposits and 25.% in loans which stood at USD 11.2 bn, USD 8.3 bn and USD 2.8 bn respectively at end December. In terms of net income, it reported a 23 % increase in, totaling USD 122 mn for the year. In, Byblos Bank ranked third among Lebanese banks in terms of total assets, customer deposits, shareholders equity and net profit. Net Profit of USD 2.96 mn was declared for Q1 09, indicating an 18.6% increase y-o-y. Loans remained flat q-o-q as a result of a cautious attitude amidst the uncertain political environment that prevailed before the parliamentary elections. On the other hand, customer deposits (including related parties deposits) displayed a positive.6% q-o-q growth reaching USD 8,78 mn. We expect customer deposits to grow at a CAGR of 10.6% over the period, to reach USD 13,703 mn at the end of the projection period with the bulk of the aggregate growth to be derived from the regional expansion strategy into under-banked countries with substantial trade finance activity. We have forecasted a 15% customer deposits growth for 2009, decelerating gradually to 8% in 2012e. Byblos Bank has a strong capital position, holding a Basel II capital adequacy ratio of 12.13% as of Q3 08, significantly above regulatory levels of 8% currently required by the Central Bank of Lebanon. As a result of a surge in lending activity, Byblos Bank is anticipated to witness an asset allocation shift in line with the general trend in the industry, which would lead to a shift of the balance sheet structure, to higher interest earning assets and result in a better asset deployment. Also, we expect this trend to spread even further in the event the government

4 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 3 undertakes privatization reforms. The loan to total assets ratio reached 2.8% in FY 08, slightly above the sector average of 22.3%. We forecast this ratio to increase gradually to 29.3% by the end of 2013e to the detriment of financial assets which are expected to decline from 3.8% to 39% over the projection period, underlying a diminishing exposure to government securities. Although loans witnessed a 25.% growth y-o-y reaching USD 2,783 mn in, in Q1 09 they remained flat. We expect loans to grow at a slower pace at a CAGR of 13.9% over the period, and to record a 12.8% growth in. Byblos Bank s loans-to-deposits ratio stood at 3% in FY 08 and is estimated to witness a slight increase, reaching 39% by 2013e. Despite this implication of lower liquidity levels, the ratio is still low when compared to international standards. We expect the NPL ratio to stand at 3.6% in and to reach.7% by 2013e in parallel of the forecasted increase in loan exposure, with loans standing at USD 3,137 mn and USD 5,331 mn respectively. At the same time, and as a consequence of the increase in the NPL ratio, we anticipate provisioning costs to increase moderately to USD 7 mn in 2010e and USD 9 mn in 2011e. Going forward, we expect Byblos Bank to maintain a strict provisioning policy as witnessed by the LLP to NPL ratio, which is forecasted to be in the range of 83%-8% over the projection period. Byblos Bank s net income stood at USD 122 mn in, recording a 23% increase y-o-y. We expect the Bank s bottom line to increase at a CAGR of 15.5% over the forecast period and reach USD 251 mn in 2013e, on the back of a loan-book expansion coupled with a higher contribution of regional entities to the Group s net income. Moreover, net income growth is expected to be bolstered by higher net interest spread resulting from easing pressures on Libor coupled with a significant deposit growth. The growth in net income will directly impact the return ratios as highlighted by the ROAE steadily increasing from 13.% in to 16.1% in 2013e. As for the ROAA, it will pursue the same rising trend moving from 1.10% in to 1.35% in 2013e. Byblos Bank is expected to maintain an adequate level of cost efficiency despite its domestic and regional expansion strategy. The bank intends to compensate the costs resulting from the setting up of new branches in Lebanon and the penetration of new markets, by deploying an efficient cost-control approach. We anticipate the cost-to-income ratio to gradually decrease from 7.38% in to.58% by the end of the projection period, on the back of a considerable surge in revenues in parallel with a strict cost containment strategy. Our approach to providing a fair value estimate for Byblos Bank is based on a discounted Equity Cash Flow (DECF) methodology. Based on our projections, our fair value estimate derived from discounted dividends attributable to common and priority shareholders and excess capital amounts to USD 2.7 per share, implying a P/B 09 of 1.38 and a P/E 09 of 8.0. We, accordingly, assign a Buy Recommendation to Byblos Bank.

5 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK Company Overview Byblos Bank was established in 1963 in Lebanon Brief background Byblos Bank's origins date back to 1950 when a commercial and finance company was founded under the name Societe Commerciale Agricole Byblos Bassil Freres & Co.. In 1963 it converted its name to Byblos Bank SAL. In its first phase of growth, the Bank expanded gradually on the domestic market where, by end of 1977, it operated a network of 13 branches. During the civil war, the Bank expanded internationally by establishing a sister bank in Brussels (1976) and branches in Paris (1980), London (1981) and Limassol/Cyprus (198). In the early 1990s and following the end of the civil war, the Bank pursued a local expansion strategy with a focus on retail banking. In the late 1990s, the Bank s domestic presence was further strengthened by a string of acquisitions, namely 19 branches of Banque Beyrouth pour le Commerce in 1997, the loan portfolio of Nova Scotia Bank in Lebanon in 1999, 100 percent of the outstanding share capital of Wedge Bank Middle East, the loan book and fixed assets of ING Barings (Lebanon branch) in 2001, and the assets and liabilities of ABN AMRO Bank N.V. (Lebanon branch) in Byblos Bank operates a network of 76 branches in Lebanon and has operations in 10 countries across Europe and the MENA region In recent years, the Bank has undertaken a number of steps to expand its business and improve its market share and profile by setting up subsidiaries in key regional countries. This includes the launching of a representative office in Abu Dhabi, UAE, in 2005 and the setting up of a branch in Erbil, Iraq in 2007 as well as the establishment of three subsidiaries, Byblos Bank Africa (2003), Byblos Bank Syria (2005) and Byblos Bank Armenia (2007). In, the Bank obtained a license for the establishment of a representative office in Lagos, Nigeria. Based on more than 50 years of growth and strategic acquisitions, Byblos Bank emerged as a major player in the Lebanese banking sector. Today it operates a network of 76 branches in Lebanon and has operations in 10 countries across Europe and the MENA region. In contrast with its most prominent competitors (Bank Audi and Blom Bank), Byblos Bank has maintained a more traditional banking profile, retaining a focus on retail, commercial and trade finance activities. However the Bank is also active in other lines of business including insurance, brokerage and research services. In line with the overall performance of the Lebanese banking sector in, Byblos Bank reported a significant growth in all its major indicators. It registered 18.% growth in assets, 15.1% growth in customer deposits and 25.% in loans which stood at USD 11.2 bn, USD 8.3 bn and USD 2.8 bn respectively at end December. In terms of net income, it reported a 23 % increase in, totaling USD 122 mn for the year. In, Byblos Bank ranked third among Lebanese banks in terms of total assets, customer deposits, shareholders equity and net profit. This reflects the aggressive growth adopted by the Group over the years, which has fueled the Bank's rise in the rankings from ninth to third place among its peers.

6 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 5 The aggressive development growth adopted by the Bank, has been funded by several capital/debt issues Capital increase and shares listing The aggressive growth adopted by the Bank, namely the domestic expansion of its retail and commercial banking over the period, and the expansion across the MENA region throughout the current decade, has been funded by several capital/debt issues over the years: Table 1: Byblos Bank s capital/debt issues Byblos Bank s capital/debt issues In 1995, Byblos Bank was the first Lebanese Bank to tap international markets through an IPO In 2002, the Bank issued USD 100 mn of subordinated bonds In 2003, the Bank issued USD 100 mn Tier 1 non cumulative redeemable preferred shares In 2005, Byblos Bank doubled its paid-up capital to USD 330 mn, thus the total equity exceeded USD 700 mn In 2007, Byblos Bank issued USD 220 mn subordinated debt convertible into common shares with a coupon of 6.5%, an exercise price of USD 2.25 per share and a 5 year tenor In, the Bank issued USD 200 mn of preferred shares Source: Byblos Bank Byblos Bank has recently redeemed all of the Series 2003 preferred shares and is in the process of replacing them by a new issue of preferred shares with a value of up to USD 200 mn. With regard to the share listing, it is worth noting that the Bank listed 30% of its outstanding shares on the BSE in 1998, while the remaining shares were listed on the BSE in 2006.

7 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 6 The Bassil family is the major shareholder of Byblos Bank SAL Ownership structure The Bassil family is the major shareholder of Byblos Bank SAL. The family directly and indirectly controls 9.1% of the Group. The below chart depicts the ownership structure of Byblos Bank SAL. Figure 1: Byblos ownership structure (*) 1.7% 38.0%.3% 3.6% 2.9% 2.6% 1.7% 1.6% 1.% 1.0% 1.2% Source: Byblos Bank (*) As at 25 February 2009, excluding preferred shares. (**) Major shareholders in Byblos Invest Holding (***) Holding less than 1% each 1.7%.3% 3.6% 2.9% 2.6% 1.7% 1.6% 1.% 1.2% 1.0% 38.0% Byblos Invest Holding S.A Luxembourg Anasco Holding (**) Francois Bassil (**) Vectra S.A.L Holding Rami Reffat El Nimer Frabas Corporation (**) Blom Invest Bank S.A.L Blakeney L.P Ali Hassan Dayekh Blakeney Investors SICAV Over,200 individual shareholders (***) Corporate structure Figure 2: Byblos corporate structure Byblos Bank S.A.L. (Lebanon) 76 branches in Lebanon 1 branch in Cyprus 1 branch in Iraq Representative office in UAE, Abu Dhabi and Nigeria, Lagos 100% 56.9% 1.5% 65% 100% 6% 76% 99.% 100% Byblos Bank Europe S.A (Belgium) Headquartered in Brussels One branch in Paris One branch in London Byblos Bank Africa (Sudan) One branch in Khartoum One branch in Bahri Byblos Bank Syria S.A. Seven branches (With management control) Byblos Bank Armenia CJSC Three branches Byblos Invest Bank S.A.L. (Lebanon - Investment Banking activities) ADIR (Adonis Insurance & Reinsurance Co. S.A.L) Lebanon Adonis Insurance and Reinsurance (Syria) Adonis Brokerage House S.A.L Byblos Management S.A.L (Holding Investment activities) Source: Byblos Bank

8 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 7 Traditionally, Byblos Bank has been developing a strong presence in the retail and commercial banking sector and has a proven ability in this segment Business lines Traditionally, Byblos Bank has been developing a strong presence in the retail and commercial banking segments and has a proven ability in these two activities. On the other hand, the Bank has diversified its revenue stream by expanding new business lines, namely investment banking, capital markets and insurance. Figure 3: Breakdown of operating income 2% 6% 21% 71% 71% 21% 2% 6% Net Interest Income Net Fees & Commissions Income Net Trading Income Other Operating Income Source: Byblos Bank Byblos Bank beneficiates from a strong retail franchise backed by 76 branches in Lebanon and 17 branches abroad Retail/Consumer banking The Bank has developed a diversified retail banking product mix. Its retail products include checking and term deposits; credit, charge and debit cards; personal, housing, car, kafalat and professional loans; financial planning; foreign exchange services; insurance and bancassurance products as well as an ATM service through a network of 95 ATMs across Lebanon. The retail banking segment, which manages more than 00,000 customer accounts, is backed by a wide distribution network covering the entire country. The Bank s domestic network consists of 76 branches and is the second largest in Lebanon. The Bank s presence is more concentrated in rural areas than other Lebanese banks. Outside Lebanon, the retail banking network consists of 17 branches including one in Limassol, Cyprus; one in Erbil, Iraq; as well as one branch in each of Brussels, London and Paris; two branches in Sudan; seven branches in Syria and three in Armenia. Commercial banking Byblos Bank provides commercial banking services to SMEs and large corporations and is considered a leading player in the local corporate banking sector. As of 30 September, the Bank had 833 corporate clients, 8 SME clients and 12 international corporate clients. Going forward, the Bank is focusing on developing its SME portfolio and is looking to capitalize on its leading position in commercial banking by crossselling its retail, capital markets and treasury products to the commercial clients employees.

9 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 8 The pie chart below depicts the breakdown of loans and advances to customers by economic sector: Figure - Breakdown of loans by economic sector 3% Around the quarter of loans outstanding are allocated to retail customers 23% 12% 26% 20% 26% 20% 2% 1% 12% 23% Trade (wholesale and retail) Manufacturing Agriculture Services Construction Retail 1% 2% 3% Other Source: Byblos Bank The international banking division provides support to the overseas operations of the Group International banking The Bank s international division manages and supervises the Bank s correspondent banking activities, as well as the activities of the Bank s overseas entities. The overseas entities department within the international banking division provides support to Byblos Bank Europe, Byblos Bank Africa, Byblos Bank Syria, Byblos Bank Armenia, the Bank s branches in Cyprus and Iraq and the Bank s representative office in the United Arab Emirates. Investment banking In order to further develop the Bank s investment banking activities, in October 2003 Byblos Bank established a new subsidiary, Byblos Invest Bank, headquartered in Beirut. The creation of this investment banking affiliate has allowed the Bank to offer its clients advisory services, while maintaining its core image as a retail bank. In 2007, Byblos launched a USD 20 mn private equity fund targeting companies in Lebanon and the Levant By end, the investment banking arm of the Bank managed USD 635 mn in total assets and the action plan revolves around expanding towards M&A and IPO advisory The investment banking arm of Byblos Bank started its operations by launching a private equity investment company under the name Byblos Venture S.A.L. The latter is a USD 20 mn private equity fund targeting minority stakes in well-established companies in Lebanon and the Levant. It was established in 2007 with international partners, namely the European Investment Bank and the OPEC Fund for International Development. This achievement is the first step of Byblos Bank in the asset management field at large and more specifically in the private equity business and could lead to a wider asset management business. In, the investment banking arm of the Bank managed to register a considerable growth in its assets, rising from USD 22 mn in 2007 to USD 635 mn by year-end, with USD 3.6 mn in reported profits. The Bank s action plan revolves around further expanding its investment banking activities towards mergers & acquisitions advisory as well as initial public offering (IPO) advisory or secondary offerings. Certain sectors will be more heavily targeted in this regard, and these include real estate investments, telecommunications and large infrastructure projects. Moreover, Byblos Invest Bank plans to participate in the privatization program expected to be conducted by the Lebanese government.

10 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 9 The Bank recorded a 3.8% market share out of the total transactions value on the Beirut Stock Exchange in The Bank is active in the insurance field through its subsidiary ADIR which is also partially owned by the French Bancassurance Group Natexis Banque Populaire Financial markets The Financial markets department serves as a platform for the Bank s treasury, capital markets and private banking services. While the treasury department manages the Bank s available liquidity, the private banking department offers investment opportunities to corporate and high-net worth customers and the capital markets department manages the Bank s equity and fixed income portfolio. The Bank started its private banking services in 2003 to attract high networth clients by offering them personalized banking services, financial solutions and investment alternatives. As of September, the Bank had 297 high net worth individuals as private banking clients. In addition, the Bank recorded a 3.8% market share out of the total transactions value on the Beirut Stock Exchange in. Insurance ADIR Insurance and Reinsurance is a subsidiary of Byblos Bank established in In May 2001, Byblos Bank group signed a partnership with the French Bancassurance Group Natexis Banque Populaire which acquired 3% of Adir. ADIR operates insurance services for individual customers and professional clients. Its products include life, fire, general accident and medical coverage. These products, in addition to providing non-interest income, present the Bank with cross-selling opportunities, which, in turn, allow broader penetration of the Bank s customer base, with many customers purchasing two or more different product offerings. In September 2007, marking the initial step in the geographical expansion of ADIR Lebanon in the MENA region, ADIR Insurance Syria was officially established with the partnership of Byblos Bank. In, ADIR Lebanon reported a growth of 32.8% in its total assets moving from USD 58 mn at year-end 2007 to USD 77 mn as at year-end with net profit of USD 3.6 mn for the year compared to USD 2.7 mn for the year 2007, implying a y-o-y growth rate of 35.2% in net profit. ADIR Syria reported a growth of 15.% in its asset base, moving from USD 26 mn at year-end 2007, to reach USD 30 mn as at year-end. It generated USD 30,000 in net profit for the year. In total, the insurance activities of Byblos Bank generated 3% of the Group s combined income in.

11 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 0 Since the mid-seventies the Bank has been present in Europe. In recent years it has expanded its business in key regional markets Geographical coverage Byblos Bank embarked on a geographical expansion in the mid-1970s to mitigate the surge in domestic risk following the start of the civil war. As a result, the Bank has been present in Europe since 1976 after the establishment of a sister bank in Brussels (1976) and branches in Paris (1980), London (1981) and Limassol/Cyprus (198). In recent years, the Bank has undertaken a number of steps to expand its business and improve its market share and profile by setting up subsidiaries in key MENA countries. To date, the international expansion of Byblos Bank has been mainly organic except its 100 percent acquisition of a bank incorporated in Armenia. In total, the Group maintains a significant international presence with operations spread across 10 countries beyond Lebanon, spanning Europe, the Middle East and Africa. In, 22.% of the Bank s total assets and 20.1% of its net income were derived from outside Lebanon (including international activities booked in Lebanon) compared to 12.1% and 2.1% respectively in 200. Figure 5: Share of international activities to total assets and to net profit (200 vs. ) In, the Bank s international operations accounted for 22.% and 20.1% of total assets and net income respectively 25% 20% 15% 12.1% 22.% 20.1% 10% 5% 2.1% The long term objective of the Bank is to reach a balanced revenue structure between Lebanon and abroad Source: Byblos Bank 0% 200 Share of international activities to total assets Going forward, the Bank aims at reaching a more balanced revenue mix between Lebanon and abroad. Within a five year period, management believes Byblos Bank will be able to generate 0% of its profits from its overseas operations. The Bank s long term objective concerning the revenue mix between Lebanon and abroad is to reach a revenue mix structure of 50%-50%, suggesting a targeted equivalent contribution of domestic operations and foreign operations to the Group s net income. Share of international activities to net profit The below pie charts depict the breakdown of total assets and the breakdown of net income by main entities for the year. With a contribution of 7% and 5% to the Group s asset base respectively, Byblos Bank Europe and Byblos Bank Syria are the main international entities in terms of assets for Byblos Bank s international activities. The bulk of net profit arises from operations in Sudan and Europe with contributions estimated at 8% and 7% respectively.

12 8% 7% 7% E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 1 Figure 6: Breakdown of total assets 3% 5% 5% 1% 78% 1% 5% 5% 3% 7% Lebanon (*) Insurance Invest Syria Sudan Europe 78% Figure 7: Breakdown of net income 3% 3% 3% 77% Lebanon (*) 3% Insurance 3% Invest 3% Syria 8% Sudan 7% Europe 77% * Including Cyprus and Erbil (Iraq) branches, UAE and Nigeria representative offices Source: Byblos Bank Byblos Bank Europe SA is headquartered in Brussels and has branches in London and Paris. In, it managed to grow its asset base by USD 5 mn and registered USD 8.2 mn in net profit for the year The European entity generates a substantial part (around 7%) of the Group s total assets and net income Europe Byblos Bank Europe S.A. was initially founded in It is headquartered in Brussels and has branches in London and Paris. For more than 30 years, Byblos Bank Europe has been accommodating European exporters in their foreign trade with the Middle East, North Africa and other African countries. The Bank provides commercial wholesale banking services and particularly trade finance in all its aspects. Through its branches in Brussels, Paris and London, Byblos Bank Europe supports Lebanese and Arab companies established in Europe and in African countries in terms of their business needs. In addition, the Paris branch provides banking services to customers located in French-speaking African countries whilst the London branch provides services to customers located in the English-speaking African countries. Byblos Bank Europe s total assets grew by USD 5 mn in, rising to USD 8 mn by the end of. Net profit reached USD 8.2 mn in, compared to USD 5.6 mn for 2007, implying a year-on-year 6.% growth rate. The European operations of Byblos Bank contributed 7% of the Group s total assets and net income in.

13 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 2 Cyprus Byblos Bank s International Banking Unit was established in Limassol in 198. Following the change of regulations in Cyprus, since early 2006, it has become an onshore branch of Byblos Bank. Byblos operates an Islamic Bank in Khartoum Sudan In 2003, after three decades of conducting business in Sudan with local banks and selective customer base, Byblos Bank established Byblos Bank Africa, a fully-fledged Islamic Bank headquartered in Khartoum, Sudan. Byblos Bank is the main shareholder in Byblos Bank Africa with an equity participation of 56.9%. Other shareholders are the Vienna- based OPEC Fund for International Development (17.5%) and the ICD Islamic Corporation Development Bank (8.75%). Byblos Bank Africa s main lines of business are commercial banking, private banking and correspondent banking. Byblos targets a 10% market share in Sudan within 5 years Byblos Bank Syria is 1.5% owned by Byblos Bank and operates a network of seven branches in Syria The Syrian entity managed to report USD.2 mn in net profit for, thus contributing to 3% of the Group s total income Byblos Bank Africa reported a 29.3% increase in its assets in rising from USD 22 mn as at year-end 2007 to USD 313 mn one year later. In terms of net profit, Byblos Bank Africa registered USD 9.6 mn in 2007 and in. Its contribution to the Group s total assets and income stood at 3% and 8% respectively in. Going forward, Byblos Bank is targeting a 10% market share in Sudan within five years. Syria Founded in 2005, Byblos Bank Syria S.A is 1.5% owned by Byblos Bank S.A.L which also holds the management control of the entity. A 51% stake was acquired by Syrian investors and the OPEC Fund for International Development has joined in the capital with 7.5%. Byblos Bank Syria began effective operations around mid-2006 and completed its first full year of operations in Byblos Bank Syria was the sixth bank to set up operations in Syria following legislation to reform and modernize the banking sector. Its operations are carried out from its head office in the Abou Remmaneh district of Damascus along with seven branches in Abou Remmaneh, Mezze, Aleppo, Homs, Lattakia, Tartous and Hama. The Bank provides a wide range of retail products including housing, auto, personal loans as well as plastic cards. The bank saw its assets grow by 57% in ending the year at USD 585 mn, up from USD 371 mn at the end of It reported USD.2 mn in net profit for, which represents 3% of the Group s total income. Going forward, Byblos Bank is targeting a 10% market share in the Syrian banking sector within five years. Abu Dhabi The group has had a representative office in Abu Dhabi, UAE since The representative office provides retail and corporate banking to its customers as well as private banking, correspondent banking and trade finance. It is strategically located to serve a number of other regional countries including Qatar, KSA, Oman, Iran and Yemen.

14 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 3 Byblos Bank entered the Armenian banking sector through inorganic growth Byblos Bank Armenia reported net loss of USD 0.8 mn in Armenia Founded in 2007, Byblos Bank Armenia is the result of Byblos Bank Group s 100% acquisition of International Trade Bank (ITB), a bank incorporated in Armenia which has its main branch in Yerevan and three other branches in Malatia, Vanadzor and Amiryan. The newly-acquired bank operates as an independent subsidiary of the Byblos Bank Group under the name Byblos Bank Armenia. In June, the EBRD and OFID also acquired stakes of 25% and 10% (respectively) in Byblos Bank Armenia s capital. The development of Byblos Bank Armenia is in line with the Bank s strategy of diversifying its assets and revenues and expanding overseas. Armenia is viewed as a significant market for the Bank with high potential for retail and commercial activities. Through its Armenian subsidiary, Byblos Bank aims at serving the Armenian Diaspora which is present in the USA, Europe, Lebanon, Syria and other parts of the world. Byblos Bank Armenia had total assets of USD 20 mn and total shareholders equity of USD 10 mn as of 31 December 2007, which increased to USD 5 mn and USD 27 mn respectively by year-end. Byblos Bank Armenia reported a net loss of USD 0.8 mn in. Iraq In 2007, Byblos Bank opened a direct branch in Erbil, Iraq. Plans are underway to open another branch in Baghdad. Byblos Bank aims at reaching a 10% market share in the Iraqi banking sector. Other opportunities Byblos Bank is evaluating a number of potential opportunities in Jordan and Egypt, as well as the establishment of operations in Algeria, Iraq, the UAE and Yemen. In August, the Bank obtained a license for a representative office in Lagos, Nigeria.

15 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 Strategy The Bank s corporate strategy is focused on creating value for its shareholders through continued domestic and regional growth, geographic and product diversification, operational efficiency, cost containment and optimizing its capital structure. In order to realize these objectives, the Bank s medium and long-term key strategies are as follows: Byblos Bank intends to consolidate its domestic positioning by expanding its branch and focusing on selective acquisitions of smaller banks Strengthen its platform and consolidate its domestic positioning The Bank intends to continue to enhance its domestic market penetration, increase market share and achieve a top three market share in each product that it offers through:. Continuing to grow organically by expanding its branch network particularly to target customers in previously under-served areas principally the Bekaa Valley, North Lebanon and South Lebanon.. Launching a program of back office centralization and streamlining of productivity processes in order to boost customer services and sales. The Bank s strategy also revolve around expanding in the MENA region, specifically in underdeveloped, highgrowth markets with low level of traditional banking activity. Pursuing its growth by focusing on selective acquisitions of smaller domestic banks with significant synergies and complementary branch networks. Particularly given its track record in domestic acquisitions, the Bank believes it is well-positioned to benefit from the potential consolidation of the domestic banking sector, which remains highly fragmented with 53 commercial banks, many of which are familyowned and lack competitive scale. Continue to expand in regional growth markets Geographic expansion is one of the Bank s key strategic objectives as the Bank intends to diversify its revenues in the MENA region, thus ensuring 0% of assets and income from international activities in five years.. The Bank plans to continue to expand in the MENA region by opening subsidiaries and branches in selected countries and through selective acquisitions of established financial institutions that are able to add new distribution capabilities while adopting the Bank s corporate culture.. The Bank believes that its entry into underdeveloped, high-growth markets with low levels of traditional banking activity will allow it to leverage its competitive advantages in terms of regional expertise and its strategic geographic position relative to other international players.. Moreover, the Bank intends to target markets where it can benefit from the presence of the Lebanese Diaspora or significant trade flows with Lebanon and gain a first-mover advantage. In August, the Bank obtained a license to open a representative office in Lagos, Nigeria and it is evaluating a number of potential opportunities in Jordan and Egypt, as well as the establishment of operations in Algeria, Iraq, the UAE and Yemen. All targets are evaluated by the Bank in the context of its strict returns criteria and its intention to focus on trade finance and certain niche segments of the markets it enters.

16 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 5 The Bank aims to achieve a more balanced mix of income across products by further developing fee-based products and services and participating in the development of the Lebanese capital markets Enhance earnings stability through an improved business mix and risk profile The Bank will continue to strive to improve its capital and balance sheet management in order to further enhance profitability and support anticipated asset growth. The Bank aims to achieve a more balanced mix of income and assets both geographically and across products.. The Bank intends to further develop fee-based products and services in order to achieve a more diversified stable revenue stream. In particular, the Bank plans to focus on maintaining its leading position in trade finance activities and developing further its treasury operations, investment banking activities and selected private banking services. Also, the Bank plans to take an active role in privatization/infrastructure projects, M&A advisory services and venture capital funds.. The Bank also intends to continue participating in the development of the Lebanese capital markets, engaging in relatively high-margin investment banking transactions in order to generate enhanced feebased income, and to expand its correspondent banking activities. Enhance cost efficiency and profitability Following the Bank s achievement of a 7.38% cost-to-income ratio in, which was below the sector average and one of the lowest among its peers, the Bank intends to reduce its cost-to-income ratio further by setting up a number of measures, namely the implementation of a new technology platform in order to enhance the quality of service, increase productivity and lower costs. Diversify further the Bank funding structure The Bank intends to continue to strengthen its balance sheet with new sources of international and other longer-term funding, thereby reducing its dependency on local market funding and on medium-term and other expensive funding sources.

17 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 6 SWOT analysis Strengths Strong franchise in domestic retail banking and SME s 2 nd largest branch network in Lebanon, more concentrated in rural areas compared to the sector generally High level of cost efficiency, with cost-to-income ratio (7.38%) significantly below sector average Stable ownership No exposure to toxic assets and structured products Strong risk management, with very low level of NPL/gross loans (at 3.9% for ) and high level of NPLs provisioning Strong liquidity in both local and foreign currency Weaknesses Reliance on interest income Negative contribution of the business in Armenia to the Group s total income Moderate profitability ratios Opportunities Ability to attract international partnerships Targeted presence to serve Lebanese and Arabs in Europe and Africa Well-capitalized bank (CAR at 12.8% as at end September ), allowing Byblos Bank to acquire peers in neighboring countries Potential consolidation by acquisition of local banks Regional expansion leading to diversification of revenues Potential to improve the cost-to-income ratio Threats Lower interest spreads in 2009 High exposure to sovereign debt Deterioration of the asset quality in light of the global economic downturn Chronic political instability in Lebanon Persistent economic imbalances in the quasi absence of adjustment reforms Impact of the global financial crisis on the Lebanese economy and banking sector

18 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 7 Latest developments The Bank recently acquired Unicredit Banca Di Roma SpA, Lebanon Branch in line with the Bank s continuing external growth strategy. Also, the Bank recently listed Global Depositary Receipts on the London Stock Exchange with an initial market value of approximately USD 80 mn, effective February Net Profit of USD 2.96 mn was declared for Q1 09, indicating an 18.6% increase y-o-y. This was driven by an operating income growth of 1.% and an operating expenses growth of 23.8%, leading to profit before taxes increase of 30.%. Earnings were additionally affected by the provision expense recorded, in contrast to Q1 08 results where no provisioning was witnessed. Table 2: Byblos Bank s Q summary income statement USD mn Q1 Q y-o-y % Net interest income Net fees & commissions Trading and investment income Non - interest income Other operating income Operating income Total operating expenses Credit loss expense Provision for the decrease in value of other financial instruments Profit before taxes Income tax expense Net profit (37.18) (0.8) (.53) (6.02) (.19) (6.3) 33.3 (8.38) % 9.0% 1.% 30.% 18.6% Source: Byblos Bank Loans remained flat q-o-q as a result of a cautious attitude amidst the uncertain political environment that prevailed before the parliamentary elections. On the other hand, deposits (including related parties deposits) displayed a positive.6% q-o-q growth reaching USD 8,78 mn. As a matter of fact, Byblos Bank has retained additional liquidity as reflected by the loans-todeposits ratio decreasing from 33.3% in Q 08 to 31.5% in Q1 09. Moreover, it is worth mentioning that due from banks increased by 6.1% over the quarter while due to banks retreated by 8% as a result of the increased fear and risk aversion that spread in the aftermath of the financial turmoil. Table 3: Byblos Bank s Q summary balance sheet USD mn Q Q q-o-q % Cash & balances with BDL Financial instruments Due from banks Loans & advances Other assets Total assets Due to banks and other financial institutions Deposits Subordinated debt Other liabilities Shareholder's equity Total liabilities and shareholders' equity 1,33,990 1,685 2, , , ,07 11,238 1,6 5,218 1,788 2, , , ,105 11, %.6% 6.1% -1.2% -9.3% 3.% -8%.6% 1.9% 5.9% 2.9% 3.% Source: Byblos Bank

19 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 8 Financial Highlights and Forecasts Byblos Bank s deposits grew at a 15% rate in to reach USD 8,292 mn despite the unstable political situation that dominated in Lebanon Source of funds Customer deposits Customer deposits are a major constituent of sources of funds, accounting for 7% of total liabilities and shareholders equity in FY 08. We expect Byblos share of deposits to total liabilities and shareholder s equity to increase slightly to 75.6% in and to remain constant over the projection period. Nonetheless, Byblos bank has witnessed a significant increase in customer deposits in as deposits grew at a 15% rate to reach USD 8,292 mn despite the unstable political situation that dominated Lebanon and the global financial crisis that started in the last quarter of. Figure 8: Customer deposits and growth rates USD mn % 15% 10% Customer deposits (lhs) % % Growth (rhs) e 2011e 2012e 2013e 0% We expect customer deposits to grow at a CAGR of 10.6% over the period Byblos Bank holds a Basel II capital adequacy ratio of 12.13% as of Q3 08, significantly above regulatory levels of 8% currently required by the BDL. Source: FFA Private Bank We expect customer deposits to grow at a CAGR of 10.6% over the period, to reach USD 13,703 mn at the end of the projection period with the bulk of the aggregate growth to be derived from the regional expansion strategy into under-banked countries with substantial trade finance activity. We have forecasted a 15% customer deposits growth for, decelerating gradually to 8% in 2012e. Shareholders equity Byblos Bank has a strong capital position, holding a Basel II capital adequacy ratio of 12.13% as of Q3 08, significantly above regulatory levels of 8% currently required by the Central Bank of Lebanon. In 2009, the bank called existing preferred shares series 2003, issued at a coupon of 12%, and is in the process of replacing them with a new issue of up to USD 200 mn at a lower coupon rate of 8% in 2009.

20 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 1 9 We expect the Bank to witness a shift in its balance sheet structure, resulting from a growth in loans and a retreat in sovereign debt exposure, in line with the general trend in the industry Uses of funds and asset allocation As a result of a surge in lending activity, Byblos Bank is anticipated to witness an asset allocation shift in line with the general trend in the industry, which would lead to a shift of the balance sheet structure, to higher interest earning assets and results in a better asset deployment. Also, we expect this trend to spread even further in the event the government undertakes privatization reforms. Figure 9: Asset Allocation 100% 90% 80% 70% 60% 50% 0% Cash and balances with BDL 30% Financial assets Due from banks 20% Loans and advances 10% Other assets 0% 2007 e 13% 0% 19% 23% 5% 2010e 12% % 15% 25% 5% 2011e 12% % 15% 25% % 2012e 12% 2% 15% 26% % 2013e 12% 2% 15% 27% % 12% 0% 15% 28% % 13% 39% 15% 29% % Source: FFA Private Bank We expect loans to grow at a CAGR of 13.9% over the projection period The loan to total assets ratio reached 25% in FY 08, slightly above the sector average of 22.3%. We forecast this ratio to increase gradually to 29% by the end of 2013e to the detriment of financial assets which are expected to decline from % to 39% over the projection period, underlying a diminishing exposure to government securities. Loans Although loans witnessed a 25% growth y-o-y reaching USD 2,783 mn in, in Q1 09 they remained flat. We expect loans to grow at a slower pace at a CAGR of 13.9% over the period, and to record a 12.8% growth in Figure 10: Total loans and growth rates USD mn % 25% % 15% Total loans (lhs) % 5% % Growth (rhs) e 2011e 2012e 2013e 0% Source: FFA Private Bank

21 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 2 0 Byblos Bank s loans-to-deposits ratio stood at 3% in FY 08 and is estimated to witness a slight increase, reaching 39% by 2013e. Despite this implication of lower liquidity levels, the ratio is still low when compared to international standards. Figure 11: Loans-to-deposits ratio The loans-to- deposits ratio is expected to witness a slight retreat moving from 3% in FY 08 to 39% in 2013e, which is still considered high by international standards USD mn Customer deposits (lhs).000 Total loans (lhs) 0 % Loans-to-deposits ratio (rhs) Source: FFA Private Bank e 2011e 2012e 2013e 5% 0% 35% 30% 25% 20% 15% 10% 5% 0% In addition, Byblos loan book is heavily reliant on the retail sector; retail loans constituted 23% of total loans in and recorded a 35% growth y- o-y, in line with the Bank s strategy to remain a dominant player in retail banking by capturing further market share in this segment. Sovereign exposure The decreasing proportion of financial assets to total assets is expected to be mainly driven by a diminishing exposure to government securities which are expected to decline from 9.9% in to 5.3% in 2013e. Figure 12: Sovereign exposure Sovereign exposure 60% 50% 0% 30% 20% 10% 0% % 9.9% 9.1% 8.5% 20010e 7.3% 20011e 6.3% 20012e 5.3% 20013e Source: FFA Private Bank

22 E Q U I T Y R E S E A R C H BANKING - BYBLOS BANK 2 1 Byblos Bank boasts a sound asset quality as reflected by the NPL ratio that stood at 3.5% in. We expect the ratio to gradually increase, thus reaching.7% by 2013e. NPLs and provisions In, despite a rapid surge in lending activity, Byblos Bank s asset quality remained sound as witnessed by a decline in the NPL ratio from.8 % in 2007 to 3.5% in. This superior asset quality is due to the Bank s tight regulations in this regard as loans are mainly originated by the bank and rarely bought on the secondary market. In addition Byblos Bank follows strict underwriting criteria and has a strong risk management. Figure 13: NPLs and provisioning 6% 8.5% 5% 8% % 83.5% 3% 83% 2% 82.5% 1% NPL/Gross loans (lhs) LLP/NPL (rhs) 0% 82% 81.5% e 20011e 20012e 20013e Source: FFA Private Bank The provisioning policy is expected to remain strict as the LLP/NPL is expected to be in the range of 83%-8% over the projection period We expect the NPL ratio to stand at 3.6% in and gradually increase to reach.7% by 2013e in parallel of the forecasted increase in loan exposure, with loans standing at USD 3,137 mn and USD 5,331 mn respectively. At the same time, and as a consequence of the increase in the NPL ratio, we anticipate provisioning costs to increase moderately to USD 7 mn in 2010e and USD 9 mn in 2011e. With regard to the provision coverage, it is worth mentioning that the Bank had a loan loss provision to non performing loans ratio (LLP/NPL) of 82.6% in 2007, above the sector average which stood at 77.2%. Going forward, we expect Byblos Bank to maintain a strict provisioning policy as witnessed by the LLP to NPL ratio, which is forecasted to be in the range of 83%-8% over the projection period. Byblos Bank s net interest spread has decreased in line with the general trend in the industry but at a significantly lower pace than its peers, due to Byblos higher proportion of LBP deposits Net interest income In the aftermath of the Lehman Brothers collapse, a trend of falling interest rates began to spread as central banks around the world started to cut prime rates. Libor was also drastically affected, as suggested by the three months Libor falling from its high of 5.7% in FY 07 to 0.5% in July At the current Libor rates, banks are witnessing a contraction on spreads resulting in pressures on the net interest income, with lower interbank rates on deposits, lower interest rates on deposits at Central Bank and lower interest rates on loans which are mostly pegged to Libor. In contrast, interest expense has also declined but at a slower pace than interest income because of the low elasticity of interest rates to deposits. Accordingly, the spread has significantly shrunk. As for Byblos bank, the net interest spread has decreased in line with the general trend in the industry but at a significantly lower pace than its peers. This is due to Byblos Bank s higher proportion of LBP deposits and to a higher proportion of variable rate loans with interest rates floors.