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 SLOWING DOWN DEPOSIT GROWTH AND NEGATIVE LOAN GROWTH YEAR-TO- OCTOBER According to banking sector statistics released this week for the month of October, the year-to-date deposit and loan growth have lagged behind previous years' similar periods. Also in this issue p.3 Number of passengers at the airport up by 7.3% year-on-year in first 11 months of 2018 p.4 Value of cleared checks down by a yearly 1.4% in first 11 months of 2018 Surveys p.5 MOODY'S AFFRIMS ITS "B3" RATING ON LEBANON BUT CHANGES OUTLOOK TO NEGATIVE FROM STABLE Moody's changed the outlook to negative from stable on the Government of Lebanon's issuer ratings and affirmed the ratings at B3. Also in this issue p.6 Lebanon's hospitality sector sees slim drop in occupancy rates and room yields in 10M 2018, says EY Corporate News p.7 NEWLY REGISTERED CARS AT 30,785 IN FIRST 11 MONTHS OF 2018, DOWN BY A YEARLY 9.5% According to data compiled by the Association of Car Importers in Lebanon, the number of newly registered passenger cars stood at 30,785 in the first 11 months of 2018, declining by 9.5% from a total of 33,996 in the same period of 2017. Also in this issue p.7 EBRD providing a US$ 75 million trade finance line to Bank Audi p.8 Net profits of Bankmed down to US$ 46 million in first 9M 2018 Markets In Brief p.9 PRICE STABILITY IN LEBANESE CAPITAL MARKETS AMID STATUS-QUO IN CABINET FORMATION PROCESS Amid a long-simmering six-month cabinet formation gridlock, Lebanon s capital markets witnessed this week net foreign currency conversions on the FX market, shy price gains on the equity market amid low trading volumes, and a relative price stability on the bond market. In details, the FX market saw net LP-to-FC conversions for commercial and non-commercial reasons, which prompted BDL to intervene in the market as a seller of US dollar. On the equity market, the BSE total turnover was limited to US$ 2.8 million and compared to an average weekly value of US$ 7.2 million since the beginning of 2018, while the price index edged up by 0.3% week-on-week. At the level of the bond market, a mixed activity reigned over. Internationals sought to restructure their portfolios by reducing their holdings of longerterm papers, while adding shorter-term ones. The weighted average yield retreated slightly by five bps to reach 10.72%. LEBANON MARKETS: WEEK OF 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 _ SLOWING DOWN DEPOSIT GROWTH AND NEGATIVE LOAN GROWTH YEAR-TO-OCTOBER According to banking sector statistics released this week for the month of October, the year-to-date deposit and loan growth have lagged behind previous years' similar periods. While deposit growth is still positive year-to-date (though noticeably lower), loan growth is in the red amid scarce lending opportunities to the private sector and amid Lebanese banks tendency to place at the Central Bank at attractive yields. In figures, the 10-month deposit growth stands at US$ 4.6 billion, against US$ 6.9 billion over last year s same period and an average of US$ 6.3 billion over the same period of the past 5 years. It is yet worth noting that deposit growth was accounted for by non-residents to the extent of 51%, against 22% over the same period last year. Having said that, similar to last year, all deposit growth was accounted for by FX deposits, with nil growth in LP deposits. Subsequently, deposit dollarization reached a 10-year high of 69.5% at end-october. At the level of loans to the private sector, the portfolio contracted by US$ 0.5 billion year-to-october, while it grew by US$ 1.4 billion over the same period last year and by an average of US$ 2.5 billion over the first 10 months of the previous 5 years. The breakdown by residency suggests that loans to the resident sector contracted by US$ 1.3 billion and loans to non-residents grew by US$ 0.8 billion since the beginning of the current year. The breakdown by currency suggests that FX loans contracted by US$ 0.7 billion while LP loans rose by US$ 0.1 billion over the 2018 10-month period. In parallel, the financial system s net foreign assets contracted by US$ 3.1 billion over the 10-month period, mainly due to the drop in the banks net foreign assets by US$ 4.3 billion, while BDL s net foreign assets rose by US$ 1.1 billion over the same period. It is still worth to mention that the drop in banks net foreign assets was partly tied to the US$ 2.3 billion growth in banks non-resident deposits over the period. EVOLUTION OF MAIN BANKING AGGREGATES Source: BDL 2
On the other hand, banks shareholders equity continued to grow this year, providing an acceptable coverage of credit, market and operational risks. The banking sector s shareholders equity rose from US$ 19.1 billion at end-december 2017 to US$ 20.0 billion at end-october 2018, the equivalent of 8.3% of total assets, corresponding to an overall capital adequacy ratio of circa 17% as per most recent BDL statistics. NUMBER OF PASSENGERS AT THE AIRPORT UP BY 7.3% YEAR-ON-YEAR IN FIRST 11 MONTHS OF 2018 Figures released by the Rafic Hariri International Airport revealed that the total number of passengers recorded a yearly 7.3% increase in the first 11 months of 2018. The total freight handled by the airport increased by 0.6% year-on-year in the 11-month period. Moreover, the number of aircraft edged up by 3.4% year-on-year in the aforementioned period. A detailed look at the activity shows that the number of incoming passengers increased by yearly 8.1% and that of departing passengers rose by 6.6% to reach 4,074,323 and 4,086,246 respectively in the first 11 months of 2018. The number of transiting passengers fell by 13.0% year-on-year to attain 4,028 in the first 11 months of 2018. When including the latter mentioned category, the total number of passengers using the airport attained 8,164,597, up by a yearly 7.3%. Excluding transiting passengers, the total would be 8,160,569, i.e. 7.3% higher than the level seen in the first 11 months of 2017. Looking at the aircraft activity, landings and take-offs recorded an increase of 3.4% each with the former and the latter amounting to 33,911 and 33,907 planes respectively in the first 11 months of 2018. Regarding the freight movement within the airport, a total of 55,123 thousand tons were imported and unloaded during the first 11 months of 2018, while 36,813 thousand tons were loaded and exported. The first mentioned activity posted an increase of 2.6% while the latter posted a 2.0% fall on a yearly basis in the first 11 months of 2018. PASSENGERS AT THE AIRPORT * (FIRST 11 MONTHS OF THE YEAR) Sources: Rafic Hariri International Airport, Bank Audi's Group Research Department 3
VALUE OF CLEARED CHECKS DOWN BY A YEARLY 1.4% IN FIRST 11 MONTHS OF 2018 Total value of cleared checks, an indicator of consumption and investment spending in the Lebanese economy, declined by 1.4% year-on-year in the first 11 months of 2018 pointing to a relative deceleration in spending during the aforementioned period. The value of cleared checks reached US$ 61,083 million in the first 11 months of 2018, against US$ 61,980 million in the corresponding period of 2017. A breakdown by currency shows that the banks clearings in Lebanese pounds amounted to LP 30,317 billion (+2.9%) in the first 11 months of 2018 while those in FC amounted to US$ 40,972 million (-3.5%). Furthermore, the number of cleared checks registered 10,898,847 in the first 11 months of 2018, down by 3.0% from 11,237,167 in the corresponding period of 2017. The average value per check rose by 1.6% year-on-year to stand at US$ 5,605 in the aforementioned period of 2018. The value of returned checks reached US$ 1,470 million in the first 11 months of 2018, against US$ 1,285 million in the corresponding period of 2017. On the other hand, the number of returned checks registered 254,257 in the first 11 months of 2018, up by 20.6% from 210,829 in the corresponding period of 2017. CLEARING ACTIVITY (FIRST 11 MONTHS OF THE YEAR, US$ MILLION) Sources: Association of Banks in Lebanon, Bank Audi's Group Research Department 4
SURVEYS MOODY'S AFFRIMS ITS "B3" RATING ON LEBANON BUT CHANGES OUTLOOK TO NEGATIVE FROM STABLE Moody's changed the outlook to negative from stable on the Government of Lebanon's issuer ratings and affirmed the ratings at B3. The negative outlook reflects an increase in risks to the government's liquidity position and the country's financial stability, in large part as a consequence of domestic and geopolitical risks that have become more intractable. In particular, in the absence of fiscal consolidation measures that would allow the release of some international loans and partly reverse the widening in risk premia observed in recent months, Lebanon's fiscal metrics that have already been among the weakest of all the sovereigns rated by Moody's would weaken further, contributing to yet higher liquidity and financial stability risks. The affirmation of the B3 rating reflects Moody's assumption that a government would be formed in the near term and would implement some fiscal consolidation that would unlock the CEDRE public investment package, which in turn would support GDP growth and ease liquidity risks. The rating affirmation also takes into account the Central Bank's demonstrated capacity to maintain a degree of financial stability despite very large macroeconomic imbalances and through times of political tensions, although the effectiveness of its financial operations may be diminishing. Moody's also affirmed Lebanon's (P)B3 senior unsecured Medium Term Note Program rating and its (P)Not Prime other short-term rating. The foreign and local-currency bond and bank deposit ceilings remain unchanged. Specifically, the foreign currency bond ceiling is unchanged at B1, the foreigncurrency bank deposit ceiling is unchanged at B3, and the local-currency bond and deposit ceilings are unchanged at Ba2. The short-term foreign-currency bond and deposit ceilings are also unchanged at Not Prime. The negative outlook on Lebanon's rating reflects an increase in domestic and geopolitical tensions that is hindering the authorities' capacity to halt the widening of fiscal and external imbalances. This situation has a negative impact on Lebanon's access to financing from international donors. More generally, heightened political risk contributes to wider risk premia and higher funding costs. One main risk is that political tensions and the policy standstill continue to further jeopardize capital inflows and committed donor disbursements, with significant repercussions on Lebanon's ability to maintain financial stability and service its debt at sustainable costs. On the domestic side, a resolution of the political deadlock that prevents a government formation since the May 6, 2018 parliamentary elections is a prerequisite in order to unlock the US$ 11 billion public investment support package committed by the international donor community during the CEDRE conference held in April 2018 in return for fiscal consolidation measures worth 1% of GDP per year over the next five years. Moody's expects the budget deficits to remain wider for longer than it previously expected, raising the government's debt burden, at a time when banks' deposits, that have been channeled by the Central Bank to finance the government's needs, are slowing. Without any government to implement some fiscal consolidation, the budget deficit is likely to stand at 10.5% of GDP in 2018, compared with 8.9% previously expected by Moody's. Higher interest payments, larger transfers to the loss-making Electricité du Liban due to higher oil prices through most of the year, and lower revenue all contribute to a wider deficit compared to 2017. For 2019 and 2020, Moody's anticipates a limited narrowing of the fiscal deficit, to 9.5% and to 9.0% of GDP, respectively. Taking into account subdued real GDP growth, around 1%-2% in the next three years, 5
Moody's estimates that the government's debt burden, excluding domestic debt holdings of public entities accounting for about 11% of GDP, would continue to increase to over 150% of GDP by 2021 from an anticipated 141% in 2018. _ LEBANON'S HOSPITALITY SECTOR SEES SLIM DROP IN OCCUPANCY RATES AND ROOM YIELDS IN 10M 2018, SAYS EY Ernst & Young issued its latest Hotel Benchmark Survey on the Middle East for the first ten 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 64.2% in the first ten months of 2018, against 65.8% in the aforementioned period of 2017. The occupancy rate within Beirut was the sixth highest among 14 cities included in the survey. It directly surpassed Makkah (61.1%) and Jeddah (60.4%), while Madina (65.4%) and Ras Al Khaimah (71.3%) came directly before Beirut. Beirut s room rate remained unchanged from the same period of 2017 at an average of US$ 186 in the first ten months of 2018. The city s growth rate ranked sixth out of 14 surveyed cities. The rate of the capital s hotels was the fifth highest in the region. It exceeded that of Riyadh (US$ 172) and Manama (US$ 162), while being surpassed by Kuwait (US$ 190) and Makkah (US$ 191). The rooms yield fell by 1.6% annually to reach US$ 120 in the first ten months of 2018 compared to US$ 122 in the same period of 2017. Beirut ranked seventh in terms of variation in the region when assessing this indicator. The room yield in Beirut was the third highest, surpassed by Jeddah (US$ 175) and Dubai (US$ 185), and higher than Makkah (US$ 116) and Ras Al Khaimah (US$ 114). ERNST & YOUNG MIDDLE EAST BENCHMARK SURVEY Sources: Ernst & Young, Bank Audi's Group Research Department 6
CORPORATE NEWS NEWLY REGISTERED CARS AT 30,785 IN FIRST 11 MONTHS OF 2018, DOWN BY A YEARLY 9.5% According to data compiled by the Association of Car Importers in Lebanon, the number of newly registered passenger cars stood at 30,785 in the first 11 months of 2018, declining by 9.5% from a total of 33,996 in the same period of 2017. According to the same source, this is due to the currently prevailing economic and political situation in Lebanon, to the 25% down payment imposed on car loans and to the increase in interest rates on car loans, among others. It is worth noting that commercial vehicle registrations reached 2,122 in the first 11 months of 2018, against 2,457 in the same period of the previous year. Korea s Kia ranked first in terms of new passenger car registration during the first 11 months of 2018, with a total of 4,761 cars, against a total of 6,971 cars during the same period of the previous year. It was followed by Korea s Hyundai with a total of 4,011 newly registered cars in the first 11 months of 2018, compared to a total of 4,483 cars registered in the year-earlier similar period. It was followed by Japan s Toyota and Japan s Nissan with a total of 3,919 and 3,705 newly registered cars respectively in the first 11 months of 2018, against 3,968 cars and 3,052 cars recorded respectively in the first 11 months of 2017. TOP BRANDS OF NEWLY REGISTERED CARS IN THE FIRST 11 MONTHS OF 2018 Sources: Association of Car Importers in Lebanon, Bank Audi's Group Research Department EBRD PROVIDING A US$ 75 MILLION TRADE FINANCE LINE TO BANK AUDI Strengthening trade from and within Lebanon, the EBRD is providing a US$ 75 million trade finance line to Bank Audi. By joining the EBRD s Trade Facilitation Program (TFP), Bank Audi will become the third issuing bank in Lebanon. The accord will allow Bank Audi to benefit from EBRD trade finance guarantees which cover the political and commercial payment risk of trade transactions. The facility will support regional integration through trade and increased access to finance for importing and exporting firms in Lebanon, especially small and medium-sized enterprises. 7
Launched in 1999, the EBRD s TFP aims to promote foreign trade to, from and among the EBRD regions. Through the Program, the EBRD has financed more than 22,500 foreign trade transactions for a total of more than 16.5 billion. Currently over 100 issuing banks in 26 countries participate in the Program, together with over 800 confirming banks and their subsidiaries around the world. In September 2017, Lebanon joined the EBRD s Southern and Eastern Mediterranean (SEMED) region, which is currently the fastest-growing region of EBRD s operations. The region includes Egypt, Jordan, Morocco and Tunisia, where the EBRD has been investing and has engaged in policy reforms since 2012, as well as the West Bank and Gaza since May 2017. In only six years, the EBRD has invested over 8.2 billion in 196 projects across the SEMED region, including six projects in Lebanon. The EBRD also became a shareholder in Bank Audi in March 2018, with a 2.5% participation in the latter s common equity. Subsequently in November 2018, EBRD signed with Bank Audi the first Green Economy Financing Facility (GEFF) in Lebanon, providing US$ 100 million to finance green projects, as well as targeted technical assistance, which was matched with an additional US$ 100 million by Bank Audi to fund similar projects. NET PROFITS OF BANKMED DOWN TO US$ 46 MILLION IN FIRST 9M 2018 BankMed posted net profits of US$ 46.3 million in the first three quarters of 2018, down from US$ 266.8 million registered in the corresponding period of 2017, as per Bankdata Financial Services. The bank s net interest income attained US$ 161.2 million in the first nine months of 2018, rising by 5.5% year-on-year from US$ 152.7 million in the first three quarters of 2017. Net fee and commission income declined by 7.8% year-on-year, from US$ 49.2 million in the first nine months of 2017 to US$ 45.4 million in the corresponding period of this year. Total operating income fell by 54.6% year-on-year to US$ 252.9 million, on the back of a decline in other operating income from US$ 283.3 million in the first three quarters of 2017 to US$ 45.2 million in the same period of this year and a fall in net gains on financial assets and net gains on financial investments. This was accompanied by a 23.0% yearly decrease in total operating expenses, which amounted to US$ 202.3 million in the first nine months of 2018, down from US$ 262.7 million in the same period of last year. The bank s total assets amounted to US$ 17.3 billion at end-september 2018, up by 4.0% from US$ 16.6 billion at end-2017. Deposits from customers stood at US$ 13.1 billion at end-september 2018, rising by 0.7% from US$ 13.0 billion at end-2017. Loans to customers registered US$ 3.7 billion at end-september 2018, down by 16.8% from end-2017. BANKMED'S NET PROFITS (US$ MILLION) Sources: Bankdata Financial Services, Bank Audi's Group Research Department 8
CAPITAL MARKETS MONEY MARKET: HIKE IN OVERNIGHT RATE DRIVEN BY NET FX CONVERSIONS AND TECHNICAL REASONS The overnight rate traced an upward trajectory over this week, reaching 75% on Friday amid reduced LP liquidity on the money market, due to technical reasons related to CNSS deposits withdrawals and driven by net foreign currency conversions on the FX market. As to 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 yearto-date total subscriptions in both categories to LP 1,334 billion. Total resident banking deposits contracted by LP 98 billion during the week ending 29th of November 2018, as per the latest monetary aggregates released by the Central Bank of Lebanon. This was driven by a LP 45 billion drop in foreign currency deposits (the equivalent of US$ 30 million) and a LP 53 billion fall in total LP resident deposits amid a LP 519 billion contraction in LP saving deposits and a LP 466 billion growth in LP demand deposits. This brought total contractions in total resident banking deposits over the month of November 2018 to LP 442 billion, amid a LP 496 billion fall in total LP resident deposits and a LP 54 billion rise in foreign currency deposits, noting that the previous week has witnessed an expansion in total resident banking deposits of LP 351 billion. INTEREST RATES Source: Bloomberg _ TREASURY BILLS MARKET: NEW 10-YEAR TBS ISSUE YIELDING 10% COMING UNDERWAY Lebanon s Ministry of Finance announced this week plans to issue ten-year Treasury bills category at a coupon of 10.0% on December 20, 2018. Concurrently, the Central Bank of Lebanon would allow subscribers to conduct exchange operations between LP time saving deposits held at BDL or LP Certificates of Deposits issued by BDL, and the 10-year LP Tbs. It is worth mentioning that the 10-year category is currently offering a yield of 7.46%. In parallel, the latest Tbs auction results for value date 13th of December 2018 showed that the threemonth category, one-year and five-year categories had full allocations. Also, the Central Bank of Lebanon allowed banks to subscribe in full to the newly-issued 15-year category (offering a coupon of 10.50%) by discounting LP Certificates of Deposits and LP time saving deposits held at BDL with a six-year maturity or less. It also allowed banks to subscribe in 10.14% of their allocations to the 15-year Tbs category, by discounting LP Certificates of Deposits and LP time saving deposits held at BDL, with a ten-year maturity. Finally, the auction results for value date 6th of December 2018 showed that total subscriptions reached LP 169 billion and were allocated as follows: LP 8 billion in the six-month category, LP 118 billion in the three-year category, and LP 43 billion in the seven-year category. These compared to maturities of LP 271 billion, resulting into a weekly nominal deficit of LP 102 billion. 9
TREASURY BILLS Sources: Central Bank of Lebanon, Bloomberg FOREIGN EXCHANGE MARKET: NET FOREIGN CURRENCY CONVERSIONS ON THE FX MARKET Amid a continuous gridlock in the cabinet formation process and rising concerns over an extended political stalemate, the foreign exchange witnessed this week net conversions in favor of foreign currencies. In details, some market players initiated the week with an increased demand for the greenback for commercial reasons, while some depositors opted to convert their LP holdings into FC holdings. This prompted the Central Bank of Lebanon to intervene on the foreign exchange market as a seller of the US dollar in order to meet conversion needs. EXCHANGE RATES Source: Bank Audi s Group Research Department STOCK MARKET: SHY WEEKLY PRICE INCREASES IN LEBANESE EQUITIES AMID LOW TRADING VOLUMES The Beirut Stock Exchange remained governed by a sluggish mood this week. The total turnover was restricted to US$ 2.3 million as compared to US$ 1.7 million in the previous week and an average weekly trading value of US$ 7.2 million since the beginning of the year 2018. Solidere shares accounted for 50.9% of total activity, followed by the banking shares with 46.6% and the industrial shares with 2.5%. As far as prices are concerned, the BSE price index registered shy price gains of 0.3% week-on-week to close at 82.81, mainly supported by price increases in Solidere and some banking shares. Four out of 11 traded stocks posted price rises, while five stocks saw price drops and two stocks recorded no price 10
change week-on-week. Solidere A shares led the advance on the Beirut Stock Exchange, posting a 6.3% surge in prices to close at US$ 6.70, followed by Solidere B shares with +6.1% to US$ 6.78, BLOM s GDR price with +0.4% to US$ 9.30 and BEMO Preferred shares 2013 with +0.2% to US$ 96.70. On the other hand, Bank Audi s GDR price retreated by 0.2% to US$ 4.70. Byblos listed share price fell by 2.8% to US$ 1.37. Holcim Liban s share price shed 3.1% to US$ 15.51. The weekly performance of the domestic stock exchange compares to shy increases in prices in broader regional stock exchanges (+0.3% as per the S&P Pan-Arab Composite Index) and decreases in prices across emerging markets (-1.0% as per the S&P Emerging Frontier Super Composite Index). AUDI INDICES FOR BSE Sources: Beirut Stock Exchange, Bank Audi s Group Research Department BOND MARKET: SLIGHT CONTRACTION IN LEBANON S WEIGHTED AVERAGE YIELD WEEK- ON-WEEK The Eurobond market was marked by a mixed activity this week, with foreigners acting as main market players amid a lack of domestic bid. Some international institutional investors offered their longer-term papers maturing in March 2027, November 2028 and February 2030. On the other hand, shorter-term papers maturing in November 2019, March 2020, April 2021, October 2022 and January 2023 attracted some bid. Under these circumstances, the weighted average bond yield retreated slightly from 10.77% last week to 10.72% this week. Concurrently, the weighted average bid Z-spread remained stable at 828 bps amid declines in US Treasuries yields. For instance, the five-year US Treasuries yield decreased from 2.75% last week to 2.72% this week. As to the cost of insuring debt, Lebanon s five-year CDS spreads contracted slightly from 795-815 bps last week to bps 770-820 this week. EUROBONDS INDICATORS Source: Bank Audi s Group Research Department 11
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