The LEBANON WEEKLY MONITOR

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1 CONTACTS The LEBANON WEEKLY MONITOR Treasury & Capital Markets Bechara Serhal (961-1) Nadine Akkawi (961-1) Private Banking Toufic Aouad (961-1) Corporate Banking Khalil Debs (961-1) RESEARCH Marwan Barakat (961-1) Jamil Naayem (961-1) Salma Saad Baba (961-1) Fadi Kanso (961-1) Gerard Arabian (961-1) Farah Nahlawi (961-1) Nivine Turyaki (961-1) Economy p.2 DROP IN DEPOSIT AND LOAN DOLLARIZATION FOR ALPHA BANKS THIS YEAR The Alpha Report, outlining the performance and positioning of the first 15 banks in Lebanon with deposits exceeding US$ 2 billion, was issued by Bankdata Financial Services WLL for the first half of Also in this issue p.3 Gross public debt at US$ 82.9 billion at end-july 2018 p.4 Cement deliveries down by a yearly 2.7% in the first seven months of 2018 p.4 Electricity production up by 1.7% in the first seven months of 2018 Surveys p.5 HDI SCORE RANK IMPROVES TO 80TH POSITION IN 2017 FROM 82ND POSITION IN 2016, AS PER UNDP According to the Human Development Index (HDI) issued by the UNDP, Lebanon witnessed an improvement in economic and social quality of life. The country s HDI score rank improved to reach the 80th position in 2017, up from the 82nd position in Also in this issue p.6 Lebanese medical device market would record moderate growth going forward, says BMI Research Corporate News p.7 NET PROFITS OF LEBANON AND GULF BANK DOWN TO US$ 13.5 MILLION IN THE FIRST HALF OF 2018 Lebanon and Gulf Bank posted net profits of US$ 13.5 million in the first half of 2018, edging down by 42.1% from US$ 23.2 million in the corresponding period of Also in this issue p.8 Independent insurance brokerage companies premiums up by 2.4% to US$ 246 million in 2017 p.8 Intra Investment to launch golf course in Roumieh p.8 Biomass factory to start operating in Koura in early 2019 Markets In Brief p.9 RETURN OF INTERNATIONAL BUYERS TO BOND MARKET AFTER RECENT PRICE FALLS Amid a prolonged delay in cabinet formation, Lebanon s capital markets were marked this week by the return of international bid to the Eurobond market, while the equity market posted continuous price declines, and the FX market saw stability in the LP/US$ interbank rate amid a sustained high level of BDL s foreign assets. On the bond market, internationals returned as buyers across the yield curve following recent sharp price falls, and given the attractiveness of Lebanese sovereigns relative to other bonds in similarly-rated countries. The weighted average yield fell by 57 bps to 10.02%. On the equity market, prices remained on the decline, with the BSE price index retreating by 0.6%. The total turnover dropped by 16% week-on-week to reach US$ 5.7 million. Finally, the FX market saw a slowdown in FCto-LP conversions amid a continuous commercial demand for the US dollar. The LP/US$ interbank rate remained quoted at LP 1,514-LP 1, LEBANON MARKETS: WEEK OF SEPTEMBER 17 - SEPTEMBER 23, 2018 Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box Lebanon - Tel: research@bankaudi.com.lb 1

2 ECONOMY _ DROP IN DEPOSIT AND LOAN DOLLARIZATION FOR ALPHA BANKS THIS YEAR The Alpha Report, outlining the performance and positioning of the first 15 banks in Lebanon with deposits exceeding US$ 2 billion, was issued by Bankdata Financial Services WLL for the first half of The analysis of the consolidated activity of Alpha banks in Lebanon and abroad suggests that the first half of the current year has witnessed a slowdown in deposit and loan growth when compared to the same period of last year. In fact, deposit growth registered 0.3% between December 2017 and June 2018 (1.7% for domestic deposits and -8.5% for foreign deposits), against a growth of 3.4% over last year s corresponding period. Loans to the private sector contracted by 3.4% year-to-date (-1.7% for domestic loans and -8.3% for foreign loans), against a positive growth of 2.9% over last year s same period. Loan contraction is being registered amid scarce lending opportunities in a sluggish domestic economy and a number of foreign economies of presence. The breakdown of domestic deposit growth by currency suggests that LP deposit growth reported a decent share of 50.2% out of total growth this year, leaving 49.8% for foreign currency deposits, bearing in mind that the latter had almost accounted for the totality of deposit growth last year. This has lead to a slight contraction in domestic deposits dollarization from 67.4% in December to 67.2% in June. The breakdown of domestic loan growth by currency suggests that while LP loans increased by 1.8% this year, FX loans declined by 3.1% over the period. This has lead to a further contraction in loan dollarization from 70.2% in December to 69.1% in June, a new record low for Alpha banks. No significant change in terms of Alpha banks primary liquidity was reported this year. Net primary liquidity as a percentage of deposits, the core measure of primary liquidity, has slightly declined from 41.5% in December 2017 to 40.8% in June 2018, with primary liquidity decreasing in Lebanese Pounds (from 43.4% to 37.1%) and increasing in foreign currencies (from 40.7% to 42.3%). Comparatively, primary liquidity stands at circa 29% for MENA banks, 17% for emerging markets banks and 18% for global banks. The first half of the year reported a slight deterioration in the asset quality of Alpha banks, though the latter remains acceptable by global and emerging markets benchmarks. Gross doubtful loans as a percentage of gross loans rose from 5.88% in December 2017 to 6.41% in June 2018 (from 7.53% to 8.16% when including substandard loans). With loan loss reserves as a percentage of doubtful loans standing at 74.91%, net doubtful loans remain contained at 1.61% of gross loans, rising to 3.04% when including substandard loans without accounting for real guarantees. Collective provisions as a percentage of net ALPHA BANKS RANKING BY MAJOR AGGREGATES AS AT JUNE 2018 Source: Bankdata Financial Services 2

3 loans yet reported a decline from 1.57% in December 2017 to 1.21% in June 2018, after the implementation of IFRS 9 early January 2018 excluding provisions on other assets and off-balance sheet as well as the excess general provisions which was booked in provisions for risk and charges. At the profitability level, Alpha banks consolidated net profits reported a year-on-year contraction of 8.1% (-2.4% for domestic net profits) to reach US$ 1.1 billion in the first half-year. But after adjusting for profits from discontinued activities, profits after tax related to operating activities have reported in the first half of 2018 the same level as in the 2017 corresponding period. Subsequently, Alpha banks return on average assets dropped from 1.06% in the first half of 2017 to 0.91% in the first half of 2018 and the return on average equity declined from 11.45% to 10.04% (from 12.65% to 10.97% for the return on average common equity). The components of return ratios suggest that asset utilization declined from 2.74% to 2.42% over the same period driven mainly by the decrease in non-interest income to average assets from 0.90% to 0.52%, while interest margins increased from 1.91% to 2.00%. The net operating margin likewise declined in parallel from 38.76% to 37.38%, driven by an increase in cost to income ratio from 48.65% to 49.99%, a rise in credit cost from 4.10% to 4.27% and an increase in tax cost from 7.97% to 8.25% between the two periods. All in all, Alpha banks continue to rest on a dedicated customer base while maintaining a healthy liquidity status and adequate capitalization and ensuring strict lending monitoring with acceptable asset quality, thus remaining apt to withstand potential pressures emanating from a difficult operating environment in the domestic market or in foreign markets of presence. GROSS PUBLIC DEBT AT US$ 82.9 BILLION AT END-JULY 2018 The data published by the Ministry of Finance in Lebanon showed that the country s gross debt reached US$ 82.9 billion at end-july 2018, up by 4.2% from the level seen at end Domestic debt was lower by 3.0% from end-2017 to reach a total of US$ 47.7 billion at end-july Lebanon s external debt grew by 16.0% from end-2017 to stand at around US$ 35.2 billion at end-july In this context, the public sector deposits at the Central Bank rose by 3.3% from end-2017 to stand at US$ 6.1 billion at end-july The public sector deposits at commercial banks edged up by 0.8% from end-2017 to reach US$ 4.3 billion at end-july GROSS PUBLIC DEBT (IN BILLIONS OF US$) Sources: Ministry of Finance, Bank Audi's Group Research Department 3

4 As such, net public debt, which excludes the public sector deposits at the Central Bank and commercial banks from overall debt figures, increased by 4.5% from end-2017 to reach a total of US$ 72.5 billion at end-july Net domestic debt amounted to US$ 37.2 billion at end-july 2018, down by 4.4% from end CEMENT DELIVERIES DOWN BY A YEARLY 2.7% IN THE FIRST SEVEN MONTHS OF 2018 Figures released by the Central Bank of Lebanon show that cement deliveries, a coincident indicator of construction activity, declined by a yearly 2.7% in the first seven months of Cement deliveries actually reached circa 2,779,347 tons in the first seven months of 2018, down from 2,855,053 tons in the corresponding seven months of It is worth recalling that cement deliveries reached 5,148,615 tons in 2017, down from 5,247,110 tons in CEMENT DELIVERIES (IN THOUSANDS OF TONS) Sources: Banque du Liban, Bank Audi's Group Research Department ELECTRICITY PRODUCTION UP BY 1.7% IN THE FIRST SEVEN MONTHS OF 2018 Data published by the Central Bank of Lebanon shows that electricity production rose by 1.7% year-onyear in the first seven months of The production totaled 8,652 million Kilowatt Hour (kwh) in the first seven months of 2018, up from 8,507 million kwh in the first seven months of In a backward look, electricity production rose by a yearly 14.5% last year from 13,129 million kwh in 2016 to 15,030 million kwh in ELECTRICITY PRODUCTION (IN MILLIONS OF KWH) Sources: Banque du Liban, Bank Audi's Group Research Department 4

5 SURVEYS HDI SCORE RANK IMPROVES TO 80TH POSITION IN 2017 FROM 82ND POSITION IN 2016, AS PER UNDP According to the Human Development Index (HDI) issued by the UNDP, Lebanon witnessed an improvement in economic and social quality of life. The country s HDI score rank improved to reach the 80th position in 2017, up from the 82nd position in The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. The HDI can also be used to question national policy choices, asking how two countries with the same level of GNI per capita can end up with different human development outcomes. These contrasts can stimulate debate about government policy priorities, as per the UNDP. The Human Development Index is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions. The health dimension is assessed by life expectancy at birth, the education dimension is measured by mean of years of schooling for adults aged 25 years and more and expected years of schooling for children of school entering age. The standard of living dimension is measured by gross national income per capita. The HDI uses the logarithm of income, to reflect the diminishing importance of income with increasing GNI. The scores for the three HDI dimension indices are then aggregated into a composite index using geometric mean. LEBANON HUMAN DEVELOPMENT INDEX AND ITS COMPONENTS Sources: UNDP, Bank Audi's Group Research Department 5

6 Lebanon s HDI score came in at in 2017, ranking 80th globally. The country was tied in 80th position with Azerbaijan and Macedonia. Brazil came in before Lebanon at 79th position attaining a score of On the other hand, Armenia ranked lower than Lebanon in the 83rd position and posting a score of With respect to the subdivisions of the HDI score, Lebanon s life expectancy at birth was 79.8 in 2017, and the country s expected years of schooling was 12.5 years. Additionally, the mean years of schooling in Lebanon was 8.7 years. Last but not least, the country s gross national income per capita was US$ 13,378. LEBANESE MEDICAL DEVICE MARKET WOULD RECORD MODERATE GROWTH GOING FORWARD, SAYS BMI RESEARCH According to a recent note by BMI Research, the Lebanese medical device market would record moderate growth in the upcoming five years. Market drivers would include the demographic boost provided by the influx of Syrian refugees, the increasing incidence of chronic diseases, medical tourism, the predominance of private healthcare providers, import reliance and stronger market regulation. However, limited funds to cover Syrian refugees and high market competition would contain market growth. BMI Research maintains its forecast and projects that the market would register a CAGR of 5.4% in US dollar terms. The value of the Lebanese medical device market would reach US$ million by 2022, as per the report. The market would benefit from real GDP growth accelerating in 2018 and 2019, with broad policy continuity and international support for the country s large-scale infrastructure plan boosting investor sentiment, resulting in an uptick in fixed investment. Nonetheless, a weak business environment would continue to cap the country s growth potential, while rising inflationary pressures will weigh on private consumption, at least until late Moreover, with little domestic manufacturing capability, BMI Research continues to expect an importreliant market in the near future. It is worth noting that medical device imports increased by 5.5% in US dollar terms to reach US$ million in 2016, which was also the country's highest ever import level. Similarly, BMI Research expects limited exports over the coming years due to a lack of manufacturing capabilities. Exports rose by 34.9% to reach US$ 5.2 million in The trade balance has a high deficit, valued at US$ million in LEBANON PROJECTED MEDICAL DEVICE MARKET Sources: BMI Research, Bank Audi's Group Research Department 6

7 CORPORATE NEWS NET PROFITS OF LEBANON AND GULF BANK DOWN TO US$ 13.5 MILLION IN THE FIRST HALF OF 2018 Lebanon and Gulf Bank (LGB Bank) posted net profits of US$ 13.5 million in the first half of 2018, edging down by 42.1% from US$ 23.2 million in the corresponding period of Net interest income amounted to US$ 26.1 million in the first six months of 2018, up by 28.3% from US$ 20.3 million recorded in the same period of last year. Net fee and commissions income increased by a yearly 1.5% to reach US$ 4.5 million in the corresponding period of The bank recorded a net loss on the sale of financial assets at amortized cost of US$ 1.0 million in the first half of 2018, against a net gain of US$ 32.0 million in the first half of Net operating income decreased by 33.1% year-on-year to reach US$ 33.1 million in the first half of Total operating expenses rose by 2.7% year-on-year to US$ 18.1 million the first half of 2018, of which personal expenses reached US$ 10.7 million, 1.8% greater than those reported in the first half of 2017, and other operating expenses recorded US$ 6.0 million in the first six months of 2018, 3.4% higher than those in the previous year s similar period. Lebanon and Gulf Bank total assets amounted to US$ 5.3 billion at end-june 2018, up by 22.9% from US$ 4.3 billion at end-june Net loans and advances stood at US$ 1.3 billion at end-june 2018, down from US$ 1.4 billion from end-june Customers deposits totaled US$ 4.1 billion at end-june 2018, up from US$ 3.7 billion at end-june Total shareholders equity rose by 5.7% to US$ million at end-june EVOLUTION OF LGB BANK NET PROFITS (US$ MILLION) Sources: LGB Bank, Bank Audi's Group Research Department 7

8 INDEPENDENT INSURANCE BROKERAGE COMPANIES PREMIUMS UP BY 2.4% TO US$ 246 MILLION IN 2017 Total premiums generated by independent insurance brokerage companies reached US$ million in 2017, constituting an increase of 2.4% from US$ million in 2016, according to data compiled by Al Bayan Magazine. Cape took the market lead with US$ 21.7 million in premiums, falling by 7.7% year-on-year. It was followed by WTW GRAS SAVOYE with US$ 21.0 million (+2.9%), ACAIR with US$ 16.3 million (+25.4%), AGCA with US$ 12.9 million (-8.7%) and NASSIF ASSURANCES with US$ 12.2 million (-6.2%). TOP TEN INDEPENDENT INSURANCE BROKERAGE COMPANIES BY PORTFOLIO Source: Al Bayan Magazine INTRA INVESTMENT TO LAUNCH GOLF COURSE IN ROUMIEH Intra Investment, a company owned by the Central Bank and other shareholders, is planning to develop an 18-hole golf course on a 600,000 square meter plot in Roumieh. Intra Investment will fund the project, at an estimated cost of US$ 200 million. The preliminary studies of the project are complete. Architecture firm Khatib & Alami conducted the studies. The project will include a five star hotel, six villas for rent, as well as sports fields. BIOMASS FACTORY TO START OPERATING IN KOURA IN EARLY 2019 A biomass factory will start operating in Koura in early The plant will produce briquettes from pruning residues of olive groves and public forests. The plant will be operated by the Koura Union of Municipalities. Investment in the project is around US$ 900,000, of which US$ 700,000 were funded by the European Union, and the remaining by the Koura Union of Municipalities. Production capacity of the plant is around 750 tons of briquettes per year, to be produced from 1,000 tons of pruning residues. Briquettes are used for stoves instead of diesel or wood. The EU is working on similar projects in Jezzine and Akkar. 8

9 CAPITAL MARKETS MONEY MARKET: WEEKLY CONTRACTION IN TOTAL LP RESIDENT DEPOSITS The overnight rate didn t shift its stance during this week, standing at 5.00% amid ample local currency liquidity at hand. As to LP Certificates of Deposits, the Central Bank of Lebanon sold LP 25 billion in the 45-day category and LP 1 billion in the 60-day category, bringing year-to-date total subscriptions in shorter-term categories to LP 1,282 billion. Total resident banking deposits contracted by LP 433 billion during the week ending 6th of September 2018, as per the latest monetary aggregates released by the Central Bank of Lebanon. This was mainly driven by a LP 475 billion fall in total LP resident deposits amid a LP 243 billion decrease in LP demand deposits and a LP 232 billion decline in LP saving deposits, while foreign currency deposits grew by LP 42 billion (the equivalent of US$ 28 million). These weekly variations compare to an average weekly growth of LP 39 billion for total LP deposits and an average weekly rise of US$ 60 million for foreign currency deposits since the beginning of the year Within this context, the total money supply in its largest sense (M4) contracted by LP 147 billion over the covered week, amid a LP 326 billion rise in the currency in circulation and a LP 40 billion retreat in the non-banking sector Treasury bills portfolio. On a cumulative basis, total resident deposits grew by LP 4,080 billion since the beginning of 2018, with foreign currency deposits growth capturing 78.5% of the total growth (the equivalent of LP 3,202 billion or US$ 2,124 million), and total LP deposits growth accounting for the remaining 21.5% (the equivalent of LP 878 billion). INTEREST RATES Source: Bloomberg _ TREASURY BILLS MARKET: NOMINAL WEEKLY DEFICIT OF LP 315 BILLION The latest Treasury bills auction results for value date 20th of September 2018 showed that the threemonth, one-year and five-year categories had full allocations. In parallel, the auction results for value date 13th of September 2018 showed that total subscriptions reached LP 126 billion and were allocated as follows: LP 26 billion in the six-month category, LP 50 billion in the three-year category, and LP 50 billion in the seven-year category. In parallel, total maturities reached LP 441 billion, resulting into a weekly nominal deficit of LP 315 billion. The latest Lebanese Treasury Securities report released by the Association of Banks in Lebanon showed that the total outstanding LP Tbs portfolio reached LP 70,605 billion at end-july The ten-year category captured 24.4% of the total, followed by the five-year category with 21.7%, the three-year category with 15.1%, the seven-year category with 14.5%, the two-year category with 11.6%, while all other categories accounted for the remaining 12.7% of the total. 9

10 TREASURY BILLS Sources: Central Bank of Lebanon, Bloomberg FOREIGN EXCHANGE MARKET: BDL S FOREIGN ASSETS AT US$ 43.3 BILLION MID- SEPTEMBER 2018 FC-to-LP conversions persisted on the foreign exchange market during this week, yet at a slower pace relative to the previous week, while some commercial demand for the US dollar continued to float on the surface. Within this context, the LP/US$ interbank rate remained stable at LP 1,514-LP 1, The Central Bank s latest bi-monthly balance sheet ending 15th of September 2018 showed that foreign assets retreated slightly by US$ 237 million during the first half of the month to reach US$ 43.3 billion mid-september. Accordingly, BDL s foreign assets covered 80.9% of LP money supply and 25.9 months of imports mid-september Such an elevated level of BDL s foreign assets is believed to provide a liquidity cushion, allowing it to defend the currency peg, by intervening on the foreign exchange market and satisfying potential demand for foreign currencies. EXCHANGE RATES Source: Bank Audi s Group Research Department STOCK MARKET: FURTHER EQUITY PRICE FALLS AMID REDUCED ACTIVITY The BSE total trading value amounted to US$ 5.7 million this week as compared to US$ 6.8 million in the previous week, down by 15.9% amid a 27.4% contraction in activity on banking shares. This compared to an average weekly turnover of US$ 5.9 million since the beginning of the year Banking shares captured the lion s share of activity, accounting for 82.3% of the total, followed by Solidere shares with 16.3% and the industrial shares with 1.4%. As far as prices are concerned, the BSE price index remained on the decline, retreating by 0.6% weekon-week to close at 84.82, accumulating year-to-date price falls of 13.6%. In details, five out of 13 traded 10

11 stocks registered price drops this week, while two stocks posted price gains and six stocks saw no price change week-on-week. Solidere B shares led the fall, posting a 6.2% plunge in prices to US$ 5.86, followed by Solidere A shares with -4.0% to US$ 6.00, BEMO Preferred shares 2013 with -3.1% to US$ 95.25, Byblos Bank Preferred 2009 with -1.3% to US$ 84.9 and Bank Audi s GDR price with -1.0% to US$ The weekly performance of the domestic stock exchange compares to increases in prices in broader regional stock exchanges (+0.4% as per the S&P Pan-Arab Composite Index) and price rises across emerging markets (+1.9% as per the S&P Emerging Frontier Super Composite Index) over the covered week. AUDI INDICES FOR BSE Sources: Beirut Stock Exchange, Bank Audi s Group Research Department BOND MARKET: BOND PRICE RECOVERY, TRIGGERED BY FOREIGN BID Eurobond prices started to recover since mid-week after reaching record low levels at the beginning of the week. This was mainly driven by the return of foreign demand to the market, with international institutional investors showing a decent bid across the yield curve to benefit from attractive Lebanese bond yields relative to peers. Within this context, the weighted average bond yield dropped from 10.59% last week to 10.02% this week. Concurrently, the weighted average bid Z-spread contracted significantly by 62 bps to reach 756 bps amid increases in US Treasuries yields. In fact, the 10-year benchmark yield extended its move above the 3% threshold, as expectations build about a further interest rate hike by the US Federal Reserve next week amid solid US economic data, and as investors adjusted fixed income portfolios for faster inflation, which could be triggered by the application of import tariffs that will filter-through to consumer prices towards the end of the year. As to the cost of insuring debt, Lebanon s five-year CDS spreads, a measure of market perception of sovereign risks at large, contracted significantly from bps last week to bps this week. EUROBONDS INDICATORS Source: Bank Audi s Group Research Department 11

12 INTERNATIONAL MARKET INDICATORS Sources: Bloomberg, Bank Audi's Group Research Department DISCLAIMER The content of this publication is provided as general information only and should not be taken as an advice to invest or engage in any form of financial or commercial activity. Any action that you may take as a result of information in this publication remains your sole responsibility. None of the materials herein constitute offers or solicitations to purchase or sell securities, your investment decisions should not be made based upon the information herein. Although Bank Audi sal considers the content of this publication reliable, it shall have no liability for its content and makes no warranty, representation or guarantee as to its accuracy or completeness. 12