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) Economy p.2 SLIGHT IMPROVEMENT IN ECONOMIC ACTIVITY, THOUGH WAY BELOW POTENTIAL Lebanon s real economy is reporting a slight improvement this year relative to last year, but the economy is still operating at way below full employment and potential output. Also in this issue p.3 Value of cleared checks down by a yearly 0.7% in the first nine months of 2017 p.4 Value of Kafalat guarantees down by 24.7% year-on-year in the first nine months of 2017 Surveys p.5 AMERICAN UNIVERSITY OF BEIRUT RANKS FIRST REGIONALLY, AS PER QS WORLD UNIVERSITY RANKINGS The American University of Beirut (AUB) was ranked 235th among 950 universities, according to QS World University Rankings for the school year This places AUB at the top of all regional universities, while the global rank remains unchanged from last year s survey. Also in this issue p.6 Tax law paves way for exploration, as per BMI Corporate News p.7 NET PROFITS OF IBL BANK UP TO US$ 46 MILLION IN THE FIRST HALF OF 2017 IBL Bank posted net profits of US$ 45.8 million in the first half of 2017, up by 19.4% from US$ 38.4 million reported in the same period of last year, as per Bankdata Financial Services. Also in this issue p.8 Creditbank s net profits down to US$ 9.4 million in the first half of 2017 Markets In Brief p.9 BALANCED FX ACTIVITY ON THE BACK OF PUBLIC BUDGET RATIFICATION Following the ratification of the first State budget in over a decade, which is set to bolster investor confidence in the domestic economy, Lebanon s capital markets saw this week a sustained balanced FX activity, while the Eurobond market saw some international selling operations that tracked US Treasuries move, and the equity market registered a reduced activity along with stability in prices. In details, demand and supply forces remained balanced, and the LP/US$ interbank stayed quoted at LP 1,514-LP 1, BDL s foreign assets reached US$ 43.5 billion mid-october 2017 following the redemption of a sovereign bond. On the Eurobond market, activity was tilted to the downside. Internationals were better sellers, triggering price falls. Lebanon s five-year CDS spreads expanded by 20 bps to 470 bps. On the equity market, the total turnover declined by 6.5% week-on-week to reach US$ 7.8 million, while the price index stood relatively unchanged amid mixed price movements. Farah Nahlawi (961-1) farah.nahlawi@banqueaudi.com Anthony Badr (961-1) anthony.badr@banqueaudi.com LEBANON MARKETS: WEEK OF OCTOBER 16 - OCTOBER 22, 2017 Nivine Turyaki (961-1) nivine.turyaki@banqueaudi.com Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box Lebanon - Tel: research@banqueaudi.com 1

2 ECONOMY _ SLIGHT IMPROVEMENT IN ECONOMIC ACTIVITY, THOUGH WAY BELOW POTENTIAL Lebanon s real economy is reporting a slight improvement this year relative to last year, but the economy is still operating at way below full employment and potential output. The Central Bank coincident indicator, a weighted average of a number of real sector indicators that mirror overall economic activity, grew by 5.7% over the first seven months of 2017, against 4.4% over the same period last year. BDL, which estimated growth at 2% last year, forecasts it at 2.5% for The IMF, which estimated growth at 1% in 2016, forecasts it at 1.5% in The slight improvement in economic sectors this year is driven by consumption sectors, while investment sectors are still lagging behind. Among consumption sectors, we mention tourism which has emerged this year from a low base last year, with the number of tourists growing by 13.1% year-on-year raising hotel occupancy from 57.3% over the first eight months of 2016 to 64.4% in the same period of Lebanon s capital formation rate, i.e investment to GDP, which has contracted from 31% in 2010 to circa 23% in 2016 did not witness any significant improvement in 2017 given the persistent environment risks that are delaying major investment decisions. Domestic investors are still in a wait and see attitude while FDI, which has contracted by 32% over the past six years, did not seem to benefit from the improved political stability that followed the domestic political settlement of the last quarter of last year. Having said that, the quantity theory of Money (MV=PQ) still seems to support a slight economic uptick. The growth in Money Supply by 8% over the first eight months of 2017 relative to the same period of 2016 was partly offset by a 5% contraction in velocity and an almost nil inflation rate, leaving positive real output growth, slightly higher than the growth reported last year. The 5% decline in velocity comes within the context of a tiny 2.1% rise in cleared checks while the banks deposit base had increased by a higher average rate of 8% over the first eight months of 2017 relative to the 2016 corresponding period. Inflation, on the other hand, has reported a 12-month moving average of -0.3% up to last August. Likewise, the evolution of real sector indicators in the first eight months of 2017 supports the relative improvement in economic activity this year. Out of 11 real sector indicators, 8 have been on the upside while three have been on the downside. Among indicators with positive growth, we mention property BDL COINCIDENT INDICATOR Source: BDL 2

3 sales with a surge of 22.1%, electricity production with a rise of 14.3%, number of tourists with an increase of 13.1%, number of passengers at the Airport with an expansion of 9%, construction permits with an uptick of 6.2%, imports with an uptick of 1.4% and exports with an uptick of 1.1%. Among indicators with negative growth, we mention merchandise at the Port with a fall of 3.1%, cement deliveries with a contraction of 1.6%, and new car sales with a drop of 0.8%. While positive growth indicators have outpaced negative growth indicators, the observed pace of changes in such indicators suggests no significant recovery in economic activity at large. VALUE OF CLEARED CHECKS DOWN BY A YEARLY 0.7% IN THE FIRST NINE MONTHS OF 2017 The total value of cleared checks, an indicator of consumption and investment spending in the Lebanese economy, fell by 0.7% year-on-year in the first nine months of 2017, pointing to a relative fall in spending during the aforementioned period. The value of cleared checks reached US$ 50,275 million in the first nine months of 2017, against US$ 50,631 million in the corresponding period of A breakdown by currency shows that the banks clearings in Lebanese Pounds amounted to LP 23,621 billion (+7.7%) in the first nine months of 2017 while those in FC amounted to US$ 34,606 million (-4.1%). Furthermore, the number of cleared checks registered 9,160,785 in the first nine months of The average value per check almost stagnated year-on-year to stand at US$ 5,488 in the aforementioned period of It is worth noting that the value of returned checks registered US$ 1,050 million in the first nine months of 2017, down by a yearly 3.1%. The number of returned checks actually stood at 169,823 in the first nine months of this year, down from 170,185 in the same period of last year. CLEARING ACTIVITY (FIRST NINE MONTHS OF EACH YEAR, US$ MILLION) Sources: BDL, Bank Audi's Group Research Department 3

4 VALUE OF KAFALAT GUARANTEES DOWN BY 24.7% YEAR-ON-YEAR IN THE FIRST NINE MONTHS OF 2017 Figures released by the Kafalat Corporation indicate that loans extended to small and medium sized companies under the guarantee of Kafalat totaled US$ 54.2 million in the first nine months of 2017, down by 24.7% year-on-year from US$ 72.0 million registered during the same period of Meanwhile, the aggregate number of guarantees amounted to 447 in the first nine months of 2017, falling from 536 guarantees given in the corresponding period of Agriculture and industry captured again the lion s share when it comes to the number of extended guarantees in the first nine months of 2017, with 183 (or 40.9% of the total number of guarantees) and 147 guarantees (33.0% of the total), respectively. Tourism came in next with 91 guarantees (20.4%), followed by handicrafts with 17 guarantees (3.8%) and specialized technologies with 9 guarantees (2.0%). As for the distribution of guarantees by area, Mount Lebanon accounted for the biggest share of given guarantees with 184 guarantees (41.2%), followed by Bekaa with 87 guarantees (19.5%), the South with 65 guarantees (14.5%), North with 42 guarantees (9.4%), Nabattiyeh with 40 guarantees (8.9%) and Beirut with 29 guarantees (6.5%). BREAKDOWN OF KAFALAT GUARANTEES Sources: Kafalat, Bank Audi's Group Research Department 4

5 SURVEYS AMERICAN UNIVERSITY OF BEIRUT RANKS FIRST REGIONALLY, AS PER QS WORLD UNIVERSITY RANKINGS The American University of Beirut (AUB) was ranked 235th among 950 universities, according to QS World University Rankings for the school year This places AUB at the top of all regional universities. The global rank remains unchanged from last year s survey. QS ranks universities according to the quality of education, the academic body, the quantity and quality of research conducted by professors. It also looks at the diplomas the professors hold, the ratio of number of faculty members to number of students, employer reputation, and the leadership roles handled by the graduates. In the Arab region, the American University of Beirut ranked first, surpassing King Fahd University of Petroleum & Minerals which was first in last year s survey. King Saud University came in the third spot, followed by the King Abdulaziz University and the United Arab Emirates University. Globally, the American University of Beirut ranked 235th amongst universities. It was preceded by University Complutense Madrid (233rd) and Loughborough University (234th), while it was followed by Al Farabi Kazakh University and University Grenoble-Alpes. The QS employer reputation survey is one indicator used in compiling the QS World University Rankings, forming 10% of the overall rankings score. It is based on a major global survey of graduate employers. Respondents are asked to identify the universities they regard as producing the best graduates. The results provide an insight into the global hierarchy of universities as it stands in the eyes of those who, perhaps more than any other group, play a role in determining the value of a degree in the job market. QS WORLD UNIVERSTY RANKINGS FOR THE ARAB REGION Sources: QS World University Rankings, Bank Audi's Group Research Department 5

6 TAX LAW PAVES WAY FOR EXPLORATION, AS PER BMI Lebanon has approved a new petroleum tax law, with the legislation passing through government earlier this week. The law introduces a 20% corporate income tax for companies involved with the exploration and production of hydrocarbons, alongside a fixed stamp-duty fee of 5 million Lebanese pounds (US$ 3,309), according to a report issued by BMI Research. In comparison to its regional neighbors, Lebanon is late to the table for the development of its offshore resources, with Cyprus making progress in exploring and monetizing prospective gas acreage, as per the report. The confirmation of long-awaited and long-delayed tax legislation in Lebanon sets the scene for the upcoming licensing round, which is due to close in October, as per the same source. BMI previously stated that the successful implementation of specific petroleum legislation would be crucial to buoy interest in the latest offshore tenders, as per the report. As such, BMI remain cautiously optimistic on a good level of interest in the round, which would support exploration in the sector moving forward. Regionally favorable tax laws would encourage companies looking to move into the offshore acreage. Furthermore, the introduction of stable terms is a key step as companies consider committing large sums of capital to the country. This is particularly pertinent in the context of lower oil prices and higher regional political risk, as per the report. According to the report, Lebanon holds substantial potential for viable hydrocarbon plays, given the exploration success seen in Cyprus and Egypt over recent years. The Levant Basin has proven to be gasrich and the Eastern Mediterranean has provided some of the largest gas discoveries over the last 10 years. Lebanon is the latest country within the region to pursue domestic hydrocarbon resources following years of political turmoil, which saw a highly fragmented political landscape and a two and half year power vacuum in which the country did not possess a functioning government, as per the report. The newly re-launched Lebanese licensing round opens up five prospective offshore blocks in an area where reserve estimates are substantial, 95.9 trillion cubic feet of gas and 865 million barrels of oil according to the Lebanese government, as per the report. According to the report, the proximity of Lebanese licensing blocks to proven hydrocarbon plays has already spurred interest in the licensing round from a wide range of international oil and gas companies. The perceived potential for further gas discoveries is reflected in the array of large oil and gas players that have pre-qualified for the round, including ExxonMobil, Total, Chevron, Lukoil, Qatar Petroleum, Eni, Shell and Statoil, as per the same source. 6

7 CORPORATE NEWS NET PROFITS OF IBL BANK UP TO US$ 46 MILLION IN THE FIRST HALF OF 2017 IBL Bank posted net profits of US$ 45.8 million in the first half of 2017, up by 19.4% from US$ 38.4 million reported in the same period of last year, as per Bankdata Financial Services. The bank s net interest income attained US$ 48.9 million in the first six months of 2017, increasing from US$ 38.8 million in the aforementioned period of Net fee and commission income rose by 14.4% year-on-year to stand at US$ 3.0 million in the first half of Net gains on financial assets declined by 33% year-on-year. Total operating income fell by a yearly 5.3% from US$ 86.3 million in the first six months of 2016 to US$ 81.7 million in the aforementioned period of Net provisions for credit losses declined significantly to US$ 2.0 million. This was accompanied by a 2.7% yearly growth in total operating expenses, which amounted to US$ 25.2 million in the first six months of 2017, up from US$ 24.6 million in the same period of last year. Among the latter category, staff expenses grew by 3.5% year-on-year to reach US$ 12.8 million in the first half of 2017 and administrative and other operating expenses edged up by a yearly 2.9% to register US$ 11.0 million in the aforementioned period of The cost-to-income ratio rose from 28.5% in the first half of 2016 to 31.0% in the corresponding period of The bank s total assets amounted to US$ 6.9 billion at end-june 2017, up by 1.8% from US$ 6.8 billion at end Deposits from customers stood at US$ 5.7 billion at end-june 2017, up by 2.1% from end Loans to customers registered US$ million at end-june 2017, down by 6.0% from end Shareholders' equity totaled US$ million at end-june 2017, up by 8.1% from end IBL BANK'S MAJOR BALANCE SHEET AGGREGATES (US$ BILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 7

8 _ CREDITBANK S NET PROFITS DOWN TO US$ 9.4 MILLION IN THE FIRST HALF OF 2017 Creditbank posted net profits of US$ 9.4 million in the first half of 2017, declining by 57.4% from US$ 22.0 million in the first half of 2016, as per Bankdata Financial Services. Net interest income amounted to US$ 26.8 million in the first half of 2017, down by 28.1% from US$ 37.3 million recorded in the first half of Net fee and commission income decreased from US$ 7.9 million in the first half of 2016 to US$ 6.5 million in the first half of Net operating income fell by 28.3% to attain US$ 39.3 million in the first half of Total operating expenses decreased by 3.7% year-on-year to US$ 28.4 million in the first half of 2017, of which staff expenses reached US$ 18.2 million, 1.8% higher than those reported in the previous year, and administrative and other operating expenses recorded US$ 8.6 million, 12.2% lower than those reported in the first half of Creditbank s assets totaled US$ 3.7 billion at end-june 2017, up by 5.8% from US$ 3.5 billion at end Net loans and advances stood at US$ 1.8 billion at end-june 2017, declining by 0.5% at end Customers deposits amounted to US$ 3.1 billion at end-june 2017, up by 4.8% from US$ 3.0 billion at end Furthermore, the bank s gross doubtful loans to gross loans rose from 4.9% at end-2016 to 5.2% at end- June 2017, while loan loss reserves on doubtful loans to doubtful loans ratio increased from 61.7% at end-2016 to 62.9% at end-june The banks return on average assets ratio stood at 0.52% in the first half of 2017, versus 1.29% a year earlier. Its return on average equity ratio reached 5.69% in the first half of 2017, compared to 15.28% the same period of the previous year. NET PROFITS (US$ MILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 8

9 CAPITAL MARKETS MONEY MARKET: RESIDENT BANKING DEPOSITS RESUME THEIR RISE The overnight rate remained stable at 4.0% this week within the context of abundant local currency liquidity at hand. As to Certificates of Deposits, the Central Bank of Lebanon sold LP 4 billion in the 60- day category, bringing total subscriptions in this category to LP 758 billion since the beginning of the year Resident banking deposits resumed their upward trajectory during the week ending October 5,2017, as a result of a LP 220 billion (the equivalent of US$ 146 million) increase in FC deposits, and given a LP 177 billion rise in total LP deposits amid a LP 373 billion growth in LP demand deposits and a LP 196 billion fall in LP saving deposits. These weekly variations compare to an average weekly growth of US$ 140 million for FC deposits and an average weekly rise of LP 28 billion for total LP deposits over the first nine months of Within this context, the money supply in its broadest sense (M4) expanded by LP 763 billion over the covered week amid a LP 369 billion growth in the currency in circulation and a slight retreat in the non-banking sector Tbs portfolio of LP 3 billion. On a cumulative basis, total resident deposits expanded by LP 9,729 billion since the beginning of the year 2017 as a result of LP 8,460 billion growth in FC deposits (the equivalent of US$ 5,612 million, accounting for 87.0% of the total deposits growth) and a LP 1,269 billion rise in LP total deposits. Consequently, the total money supply (M4) expanded by LP 10,311 billion since the beginning of the year 2017 amid a LP 185 billion increase in the currency in circulation and a LP 372 billion rise in the non-banking sector Tbs portfolio. INTEREST RATES Source: Bloomberg _ TREASURY BILLS MARKET: PRIMARY TBS MARKET CONTINUE TO REGISTER WEEKLY NOMINAL SURPLUSES The primary Treasury bills market continued to see surpluses, especially within the context of BDL s latest operations that imposed on banks to use the proceeds of LP facilities provided the Central Bank in the primary and secondary Tbs market. In details, total subscriptions of LP 953 billion were reported during the auction date October 12, 2017 and were allocated as follows: LP 82 billion in the six-month category, LP 521 billion in the three-year category and LP 350 billion in the seven year category, while maturities totaled LP 566 billion, resulting into a nominal weekly surplus of LP 387 billion. In parallel, the latest auction results for value date 19th of October 2017 showed that the five-year category (offering a coupon of 6.74%) had an allocation of 33.4% given the increased appetite for higher-yielding papers following BDL s new operations, while the three-month category (offering a yield of 4.44%) and the one-year category (offering a yield of 5.35%) had full allocations. 9

10 TREASURY BILLS Sources: Central Bank of Lebanon, Bloomberg FOREIGN EXCHANGE MARKET: CONTRACTION IN BDL S FOREIGN ASSETS ON SOVEREIGN BOND REDEMPTION The foreign exchange market continued to witness some conversions in favor of the Lebanese Pound in the aim of settling VAT payments, while the commercial demand for the US dollar persisted. Within this context, commercial demand continued to trade the greenback at a rate hovering between LP 1,514 and LP 1, In parallel, the Central Bank of Lebanon s foreign assets contracted by US$ 524 million during the first half of October to reach US$ 43.5 billion mid-october, as per BDL s latest bi-monthly balance sheet ending October 15, The fall in foreign assets came within the context of a US$ 587 million drop in public sector deposits at BDL, given the redemption of a US$ 775 million sovereign bond on October 12, Accordingly, BDL s foreign assets recorded a year-to-date growth of US$ 2.8 billion, mainly supported by the Central Bank of Lebanon s operations. Accordingly, BDL s foreign assets-to-lp money supply ratio rose from 74.4% at end-2016 to 78.3% mid-october EXCHANGE RATES Source: Bank Audi s Group Research Department _ STOCK MARKET: STABILITY IN BSE PRICE INDEX AMID MIXED PRICE MOVEMENTS The BSE total trading value declined by 6.5% week-on-week to reach US$ 7.8 million (excluding block trades on Solidere A and B shares for US$ 1.75 million). Banking shares captured 51.2% of activity, following by Solidere shares with 46.7% and industrial shares with 2.1%. The average daily trading value declined from US$ 1,675 thousand last week to US$ 1,565 thousand this week, resulting into a drop in the 10

11 trading volume index from to As far as prices are concerned, the BSE price index barely edged up by 0.02% to close at amid mixed price movements. In details, Solidere A share price retreated by 0.2% to US$ Solidere B share price stood unchanged at US$ As to banking stocks, Bank Audi s listed share price rose by 0.9% to US$ Bank Audi s GDR price declined by 0.8% to close at US$ BLOM s listed share price stood unchanged at US$ BLOM s GDR price fell by 1.2% to US$ Byblos Bank s listed share price went up by 1.2% to close at US$ Amongst industrials, Holcim Liban s share price shed 1.8% to US$ Ciments Blancs Bearer s share price stood unchanged at US$ The weekly performance of the domestic stock exchange compares to shy price decreases in broader regional stock exchanges (-0.1% as per the S&P Pan-Arab Composite Index) and price declines across emerging markets (-0.5% as per the S&P Emerging Frontier Super Composite Index over the covered period). AUDI INDICES FOR BSE Sources: Beirut Stock Exchange, Bank Audi s Group Research Department BOND MARKET: EUROBOND MARKET BETTER OFFERED BY INTERNATIONALS The Eurobond market was better offered by internationals this week. In details, foreign market players offered their longer-term papers maturing between 2026 and 2037, tracking US Treasuries move after the US Senate adopted a budget resolution, giving impetus to the US President s planned tax cuts. On the other hand, some internationals showed a shy bid for shorter-term Lebanese sovereigns maturing in November 2018 and November Within this context, the weighted average yield increased by 5 bps to close at 6.05%, while the weighted average bid Z-spread remained stable at 420 bps amid rises in US Treasuries yields. As to the cost of insuring debt, Lebanon s five-year CDS spreads expanded by 20 bps, moving 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