The LEBANON WEEKLY MONITOR

CONTACTS The LEBANON WEEKLY MONITOR Treasury & Capital Markets Bechara Serhal (961-1) 977421 bechara.serhal@bankaudi.com.lb Nadine Akkawi (961-1) 977401 nadine.akkawi@bankaudi.com.lb Private Banking Toufic Aouad (961-1) 954922 toufic.aouad@bankaudipb.com Corporate Banking Khalil Debs (961-1) 977229 khalil.debs@bankaudi.com.lb RESEARCH Marwan Barakat (961-1) 977409 marwan.barakat@bankaudi.com.lb Jamil Naayem (961-1) 977406 jamil.naayem@bankaudi.com.lb Salma Saad Baba (961-1) 977346 salma.baba@bankaudi.com.lb Fadi Kanso (961-1) 977470 fadi.kanso@bankaudi.com.lb Gerard Arabian (961-1) 964047 gerard.arabian@bankaudi.com.lb Farah Nahlawi (961-1) 959747 farah.nahlawi@bankaudi.com.lb Nivine Turyaki (961-1) 959615 nivine.turyaki@bankaudi.com.lb Economy p.2 A RELATIVE STABILITY IN FINANCIAL INFLOWS TO LEBANON OVER THE FIRST EIGHT MONTHS OF 2018 A relative stability in financial inflows to Lebanon and a net growth in trade deficit was recorded over the first eight months of 2018 relative to the same period of last year. Financial inflows to Lebanon recorded US$ 10.6 billion during the period, almost unchanged from last year s same period. Also in this issue p.3 Gross public debt at US$ 83.7 billion at end-august 2018 p.4 Number of tourists up by 3.9% year-on-year in the first nine months of 2018 Surveys p.5 GOLDMAN SACHS MORE UPBEAT ON PROSPECTS FOR ECONOMIC POLICY AGENDA IN LEBANON According to Goldman Sachs, political breakthrough is expected soon in Lebanon, with the bank more upbeat on prospects for the economic policy agenda. Also in this issue p.6 Lebanon's hospitality sector sees slight contraction in occupancy rates and room yields in 8M 2018, says EY Corporate News p.7 BBAC S NET PROFITS DOWN BY A YEARLY 5.3% TO US$ 24.9 MILLION IN THE FIRST HALF OF 2018 BBAC s consolidated net profits amounted to US$ 24.9 million in the first half of 2018, down from US$ 26.3 million in the same period of last year, as per Bankdata Financial Services. Also in this issue p.8 Net profits of IBL Bank up to US$ 67.4 million in the first half of 2018 Markets In Brief p.9 RELATIVE RELIEF IN LEBANON S CAPITAL MARKETS ON CABINET OPTIMISM Amid rising optimism over the likelihood of reaching a near breakthrough in the cabinet formation gridlock, Lebanon s capital markets saw this week an increase in equity prices, a resumed foreign demand for Eurobonds, and a relatively balanced activity on the FX market following net FC conversions observed in the previous week. In details, international institutional investors showed a noticeable bid for Lebanese sovereigns, which led to a 75 bps contraction in the weighted average yield to reach 9.23%, its lowest level since August 2018. On the equity market, the BSE price index reversed its downward trajectory, registering a growth of 0.8%, mainly supported by significant price gains in Solidere shares. The total turnover contracted by 46.5% week-on-week to reach US$ 6.8 million. At the level of the FX market, demand and supply forces resumed their balance, with the interbank rate still hovering around LP 1,514-LP 1,514.50, while BDL s foreign assets reached US$ 43.1 billion mid-october 2018, covering 81% of LP money supply. LEBANON MARKETS: WEEK OF OCTOBER 15 - OCTOBER 21, 2018 Bank Audi sal - Group Research Department - Bank Audi Plaza - Bab Idriss - PO Box 11-2560 - Lebanon - Tel: 961 1 994 000 - email: research@bankaudi.com.lb 1

ECONOMY _ A RELATIVE STABILITY IN FINANCIAL INFLOWS TO LEBANON OVER THE FIRST EIGHT MONTHS OF 2018 A relative stability in financial inflows to Lebanon and a net growth in trade deficit was recorded over the first eight months of 2018 relative to the same period of last year. Financial inflows to Lebanon recorded US$ 10.6 billion during the period, almost unchanged from last year s same period. In parallel, the trade deficit went up from US$ 11.2 billion to US$ 11.7 billion between the two periods. This increase in the trade deficit by 4.8% comes within the context of a 4.7% growth in imports and a 4.3% increase in exports over the same period. As such, imports went up from US$ 13.1 billion to US$ 13.7 billion while exports moved from US$ 1.9 billion to US$ 2.0 billion between the two periods. Subsequently, the balance of payments recorded a deficit of US$ 1.1 billion over the period, against a deficit of US$ 0.6 billion during the same period of 2017. The latter was triggered by a decline of US$ 2.7 billion in banks net foreign assets, against a OCTOBER growth in 15 BDL s - OCTOBER net foreign 21, assets 2018by US$ 1.6 billion over the first eight months of the year. Going further into details, the breakdown of imports by major products suggests that the most significant increase was reported in jewelry with 34.9%, electrical equipments with 25.5%, livestock and animal products with 18.3%, chemical products with 5.6% and metals and metal and products with 2.4%. In parallel, imports of transport vehicles reported a 9.7% decline, followed by cement and stone products with 6.7% and food products with 3.3% over the first eight months of 2018 relative to the same period of 2017. The breakdown of imports by country of origin suggests that the most significant increase was reported in imports from UAE with 65.6% over the period, KSA with 41.6%, Turkey with 30.1%, Greece with 24.2%, Switzerland with 23.9% and China with 10.1%. In parallel, imports from Spain reported a 13.7% decline, followed by Russia with -10.8%, Egypt with -4.7%, and Germany with -3.9% over the first eight months of 2018 relative to the same period of 2017. The analysis of exports by major products suggests that exports of metals and metal products reported a 22.7% hike over the same period, followed by plastic products with 22.1%, jewelry with 16.7% and chemical products with 7.4%. In parallel, exports of textiles and textile products declined the most with LEBANON'S FOREIGN TRADE ACTIVITY Source: Lebanese customs 2

a drop of 26.1%, followed by food products with a decline of 12.1% and electrical equipments with a decrease of 6.9% between the two periods. The breakdown of exports by country of destination suggests that the most significant increase was reported in exports to UAE with 71.3%, followed by exports to Qatar with 50.0%, exports to Turkey with 23.1% and Switzerland with 12.9%. In parallel, exports to Syria reported a 30.3% decline, followed by South Africa with -29.0%, Iraq with -19.7%, Kuwait with -11.3% and Jordan with -5.0% over the first eight months of 2018 relative to the same period of 2017. GROSS PUBLIC DEBT AT US$ 83.7 BILLION AT END-AUGUST 2018 The data published by the Ministry of Finance in Lebanon showed that the country s gross debt reached US$ 83.7 billion at end-august 2018, up by 5.2% from the level seen at end-2017. Domestic debt was lower by 1.6% from end-2017 to reach a total of US$ 48.3 billion at end-august 2018. Lebanon s external debt grew by 16.4% from end-2017 to stand at around US$ 35.4 billion at end-august 2018. In this context, the public sector deposits at the Central Bank rose by 8.6% from end-2017 to stand at US$ 6.4 billion at end-august 2018. The public sector deposits at commercial banks edged up by 2.9% from end-2017 to reach US$ 4.4 billion at end-august 2018. GROSS PUBLIC DEBT (US$ BILLION) Sources: Association of Banks in Lebanon, Bank Audi's Group Research Department 3

As such, net public debt, which excludes the public sector deposits at the Central Bank and commercial banks from overall debt figures, increased by 5.1% from end-2017 to reach a total of US$ 72.9 billion at end-august 2018. Net domestic debt amounted to US$ 37.5 billion at end-august 2018, down by 3.7% from end-2017. NUMBER OF TOURISTS UP BY 3.9% YEAR-ON-YEAR IN THE FIRST NINE MONTHS OF 2018 The latest figures released by the Ministry of Tourism showed that the number of tourists posted a 3.9% yearly increase in the first nine months of 2018 following an increase of 11.3% posted in the same period of the previous year. In fact, the number of tourists registered 1,505,745 in the first nine months of 2018, compared to 1,449,517 tourists posted in the same period of 2017. In details, Europe and Arab countries had the lion s share in the contribution to the number of tourists with 35.7% (537,846 tourists) and 27.8% (419,142 OCTOBER tourists) 15 respectively. - OCTOBER 21, 2018 These were followed by tourists from America which took over a share of 19.1% (287,887 tourists). Tourists from Asia came in after with a share of 6.9% (103,705 tourists), while those of Africa followed with a share of 5.8% (87,630 tourists). It is worth noting that tourists from most continents registered a positive performance with the highest growth coming from the European tourists that grew by a yearly 9.5%. This was followed by an increase in American tourists by 8.7%, Oceanian tourists by 6.9% and African tourists by 6.8%. However, tourists from Arab countries registered a decline of 5.5% year-on-year. NUMBER OF TOURISTS (FIRST NINE MONTHS OF THE YEAR) Sources: Ministry of Tourism, Bank Audi's Group Research Department 4

SURVEYS GOLDMAN SACHS MORE UPBEAT ON PROSPECTS FOR ECONOMIC POLICY AGENDA IN LEBANON According to Goldman Sachs, political breakthrough is expected soon in Lebanon, with the bank more upbeat on prospects for the economic policy agenda. The report added that Lebanese policy-makers appear to have a clear focus on the key economic priorities they intend to address in the immediate term. Starting with fiscal consolidation, this appears to be a priority not only because of general concerns regarding the sustainability of public finances but also because of the requirement made by major donors in the Cedre conference in April that any funding would be contingent on the reduction of the budget deficit by 1% of GDP each year, as per the report. It was conceded that there was little to do in the near term on the bulk of government spending, given that close to 100% of revenues (and rising) goes on interest payments and wages. There was little prospect as well for near-term revenue-raising measures. That said, an area where policy-makers seem to have identified relatively easy fiscal gains is in a reduction in subsidies to EDL, which they expect to amount to around US$ 2 billion this year (3.5% of GDP). Second, reforming the energy sector was cited as a key priority for policy-makers not only because of the potential savings to the government, but also because energy shortages have had a negative impact on economic growth and on perceptions of government competence and integrity, as per Goldman Sachs. The current focus on energy reforms aims to raise energy tariffs as soon as possible. It also aims to engage international energy companies to rehabilitate the generation plants and distribution network with the aim of increasing efficiency such that production costs are substantially reduced and energy output substantially increased. Policymakers also showed intent to engage with the private sector longer term via BOTs and PPPs to expand the overall capacity of the system. Third, the Cedre process featured highly on the agenda for both public and private interlocutors, and is likely to be a major priority for the new government, according to Goldman Sachs. Unlocking the funds is contingent on progress on the fiscal consolidation front, energy reform, together with a broad range of other reforms, and enabling legislation. According to the government officials, progress is possible in the current political climate because of the broad consensus on economic policy, as mentioned earlier, as per the report. Goldman Sachs also discussed the outlook for government debt and financing with both the Ministry of Finance and the Banque du Liban (BdL). The key takeaways were that the the US$ 5.5 billion debt swap carried out earlier this year potentially pre-finances Eurobond maturities up to and including those of April 2019. There is therefore limited financing risk in the short term. Additionally, Goldman Sachs added that both the Ministry of Finance (MoF) and the BdL were categoric that they had no intention of carrying out further debt swaps on the basis that this would undermine confidence in debt markets and distort pricing. 5

_ LEBANON'S HOSPITALITY SECTOR SEES SLIGHT CONTRACTION IN OCCUPANCY RATES AND ROOM YIELDS IN 8M 2018, SAYS EY Ernst & Young issued its latest Hotel Benchmark Survey on the Middle East for the first eight months of 2018 (four and five star hotels), in which it showed that the performance of Lebanon s hospitality sector witnessed a slowdown in occupancy rates and room yields. As a matter of fact, the occupancy rate of four and five star hotels within the capital reached 62.6% in the first eight months of 2018, against 64.3% in the aforementioned period of 2017. The occupancy rate within Beirut was the seventh highest among 14 cities included in the survey. It was directly surpassed by that of Makkah (65.2%) and Madina (69.5%), while it came before that of Jeddah (62.1%) and Amman (58.3%). Beirut s room rate rose from an average of OCTOBER US$ 184 in 15 the - OCTOBER first eight 21, months 2018 of 2017 to US$ 188 in the corresponding period of 2018, equivalent to a yearly increase of 2.2%. The city s growth rate ranked 5th out of 14 surveyed cities. The rate of the capital s hotels was the 5th highest in the region. It exceeded that of Manama (US$ 185) and Riyadh (US$ 173), while being surpassed by Kuwait (US$ 191) and Makkah (US$ 203). The rooms yield fell by 0.8% annually to reach US$ 118 in the first eight months of 2018 compared to US$ 119 in the same period of 2017. Beirut ranked ninth in terms of variation in the region when assessing this indicator. The room yield in Beirut was the fourth highest, surpassed by Makkah (US$ 133) and Dubai (US$ 174), and higher than Ras Al Khaimah (US$ 116.4) and Kuwait (US$ 108). ERNST & YOUNG MIDDLE EAST BENCHMARK SURVEY Sources: Ernst & Young, Bank Audi's Group Research Department 6

CORPORATE NEWS BBAC S NET PROFITS DOWN BY A YEARLY 5.3% TO US$ 24.9 MILLION IN THE FIRST HALF OF 2018 BBAC s consolidated net profits amounted to US$ 24.9 million in the first half of 2018, down from US$ 26.3 million in the same period of last year, as per Bankdata Financial Services. Net interest income rose by a yearly 9.3% to stand at US$ 55.4 million in the first half of 2018, while net fee and commission income went down by 2.1% year-on-year to attain US$ 15.3 million in the aforementioned period of 2018. Total operating income amounted to US$ 76.8 million in the first half of 2018, up by 4.2% from US$ 73.7 million in the first half of 2017. Total operating expenses increased by 25.4% annually, from US$ 40.2 million in the first six months of 2017 to US$ 50.4 million in the first six months of 2018, of which staff expenses amounted to US$ 22.9 million, up by 1.3% year-on-year, and administrative and other operating expenses totaled US$ 25.1 million, up by a yearly 67.0%. Total assets stood at US$ 7.6 billion at end-june 2018, up by 10.1% from end-2017. Loans to customers went up by 2.2% from end-2017 to stand at US$ 1.8 billion at end-june 2018. Customers deposits amounted to US$ 6.2 billion at end-june 2018, up by 3.5% from end-2017. BBAC'S MAJOR BALANCE SHEET AGGREGATES (US$ BILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 7

NET PROFITS OF IBL BANK UP TO US$ 67.4 MILLION IN THE FIRST HALF OF 2018 IBL Bank posted net profits of US$ 67.4 million in the first half of 2018, up by 47.0% from US$ 45.8 million reported in the same period of last year, as per Bankdata Financial Services. The bank s net interest income attained US$ 93.9 million in the first six months of 2018, increasing from US$ 48.9 million in the aforementioned period of 2017. Net fee and commission income fell by 1.0% yearon-year to stand at US$ 3.0 million in the first half of 2018. Net gains on financial assets declined by 31.2% year-on-year. Total operating income increased by a yearly 44.0% from US$ 81.7 million in the first six months of 2017 to US$ 117.7 million in the aforementioned period of 2018. Net provisions for credit losses rose to US$ 6.8 million. This was accompanied by a 10.7% yearly growth in total operating expenses, which amounted to US$ 27.9 million in the first six months of 2018, up from US$ 25.2 million in the same period of last year. Among the latter category, staff expenses grew OCTOBER by 17.5% 15 year-on-year - OCTOBER to 21, reach 2018 US$ 15.0 million in the first half of 2018 and administrative and other operating expenses edged up by a yearly 4.8% to register US$ 11.5 million in the aforementioned period of 2018. The cost-to-income ratio declined from 31.0% in the first half of 2017 to 23.7% in the corresponding period of 2018. The bank s total assets amounted to US$ 7.6 billion at end-june 2018, up by 5.3% from US$ 7.2 billion at end-2017. Deposits from customers stood at US$ 5.8 billion at end-june 2018, up by 0.9% from end-2017. Loans to customers registered US$ 877.0 million at end-june 2018, down by 8.0% from end-2017. Shareholders' equity totaled US$ 581.8 million at end-june 2018, up by 2.0% from end-2017. IBL BANK'S TOTAL ASSETS (US$ BILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 8

CAPITAL MARKETS MONEY MARKET: OVERNIGHT RATE AT REGULAR LEVEL AMID AS LP LIQUIDITY RETURNS TO THE MARKET The overnight rate closed the week at its regular level of 5.0%, after reaching 20% at the beginning of the week, as the local currency liquidity returned to the money market. The said drop in the overnight rate is mainly attributed to technical reasons related to (1) the contraction in demand for foreign currencies on the foreign exchange market parallel with a rising interest in LP holding, and (2) CNSS deposits at commercial banks. A closer look at monetary aggregates shows that the money supply (M3) grew by circa LP 4,095 billion (the equivalent of US$ 2,764 million) since year-end 2017 till October 4, 2018, mainly driven by foreign currency deposit growth. INTEREST RATES Source: Bloomberg _ TREASURY BILLS MARKET: SHY NOMINAL WEEKLY DEFICIT OF LP 20 BILLION The latest Treasury bills auction results for value date 18th of October 2018 showed that the three-month category (offering a yield of 4.44%), the one-year category (offering a yield of 5.35%) and the five-year category (offering a coupon of 6.74%) had full allocations. In parallel, the auction results for value date 11th of October 2018 showed that total subscriptions reached LP 329 billion and were allocated as follows: LP 4 billion in the six-month category (offering a yield of 4.99%), LP 100 billion in the three-year category (offering a coupon of 6.50%), and LP 225 billion in the seven-year category (offering a coupon of 7.08%). In parallel, total maturities reached LP 349 billion, resulting into a weekly nominal deficit of LP 20 billion. It is worth mentioning that total subscriptions in Tbs reached LP 21,419 billion during the first nine months of 2018, and compared to total maturities of LP 14,456 billion, resulting into a nominal surplus of LP 6,963 billion. Concurrently, the Central Bank of Lebanon s LP securities portfolio registered a LP 223 billion growth over the covered period, taking into account a US$ 5.5 billion swap operation undertaken by the Central Bank of Lebanon with the Ministry of Finance in May 2018, through which BDL exchanged US$ 5.5 billion of LP Treasury bills in its LP securities portfolio with newly issued Eurobonds. 9

TREASURY BILLS OCTOBER 15 - OCTOBER 21, 2018 Sources: Central Bank of Lebanon, Bloomberg FOREIGN EXCHANGE MARKET: FX MARKET RETURNS TO BALANCED ACTIVITY Amid rising optimism about a cabinet breakthrough, the foreign exchange market witnessed a relatively balanced activity this week, after registering net conversions in favor of the US dollar in the previous week. Some market players showed demand for foreign currencies for commercial reasons, while some others converted their FC holdings into LP holdings either to benefit from lucrative LP rates on some saving products offered by commercial banks or to settle VAT payments. Within this context, commercial banks continued to trade the US dollar at a rate hovering around LP 1,514-LP 1,514.50. On the other hand, the Central Bank of Lebanon s latest bi-monthly balance sheet ending 15th of October 2018 showed that foreign assets contracted by US$ 402 million during the first half of the month to reach US$ 43.1 billion mid-october, mainly driven by net LP-to-FC conversions amid heightened political uncertainties before the recent relief. Accordingly, BDL s foreign assets covered 81.0% of LP money supply, which shows the Bank s continued ability to safeguard the peg. EXCHANGE RATES Source: Bank Audi s Group Research Department STOCK MARKET: EQUITY PRICES UP WEEK-ON-WEEK ON CABINET FORMATION OPTIMISM Amid hopes about a near breakthrough in the cabinet formation deadlock, the Beirut Stock Exchange shifted this week to a positive territory, as reflected by a 0.8% rise in the price index to close at 85.90. Solidere shares, which are usually the most vulnerable to local political developments, led the advance on the Beirut Stock Exchange. Solidere A share price jumped by 16.0% to reach US$ 7.02. Solidere B share price climbed by 15.5% to US$ 6.99. Holcim Liban s share price surged by 6.5% to US$ 17.95. On the other hand, four out of eight banking stocks traded this week, registered price falls. BLOM s listed 10

share price and BLOM s GDR price fell by 2.6% each to reach US$ 9.25 each. Bank Audi s listed shares went down by 2.2% to close at US$ 4.89. Byblos Bank Preferred 2009 share prices plunged by 11.7% to US$ 75.0. At the level of to trading volumes, the BSE total turnover contracted by 46.5% week-on-week to reach US$ 6.8 million. This compared to an average weekly trading value of US$ 12.7 million since the beginning of the year 2018. The weekly performance of the domestic stock exchange compares to increases in prices in broader regional stock exchanges (+1.4% as per the S&P Pan-Arab Composite Index) and price retreats across emerging markets (-0.8% 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: LARGEST WEEKLY CONTRACTION IN YIELDS SINCE THE BEGINNING OF 2018 ON CABINET FORMATION HOPES Given increased optimism that the cabinet formation process is nearing its final stage, and bets that any resolution to the political situation would bring benefits to Lebanon s economic and financial outlook, the Eurobond market witnessed this week a healthy international institutional demand across the yield curve, which resulted into wide price corrections. The weighted average yield reached 9.23% at the end of this week, which is its lowest level since end- August 2018. It compares to a yield of 9.98% at the end of last week, moving down by 75 bps, noting that this is its largest weekly contraction since the beginning of the year 2018. Also, the weighted average bid Z-spread shrank by 77 bps week-on-week to reach 672 bps. As to the cost of insuring debt, Lebanon s five-year CDS spreads contracted from 710-730 bps last week to 670-690 bps this week, in a sign of a relatively improved market perception for sovereign risks at large. EUROBONDS INDICATORS Source: Bank Audi s Group Research Department 11

INTERNATIONAL MARKET INDICATORS OCTOBER 15 - OCTOBER 21, 2018 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