BLOM Bank 2017 Earnings Conference Call Hosted by Exotix 21 February 2018 Hello, ladies and gentlemen, and welcome to the BLOM Bank 2017 Results Conference Call. My name is Operator, and I ll be your coordinator for today s conference. I will now hand you over to your host, Rahul Shah of Exotix Capital, to begin today s conference. Thank you. Thanks Operator. Hello everyone and welcome to today s BLOM Bank 2017 Results Call. On behalf of Exotix Capital, it s my pleasure to introduce our main speaker, Mr Saad Azhari, who is Chairman and General Manager of BLOM Bank. I ll ask Mr Azhari to make a few prepared comments and after that we will open up the lines for the Q&A session. Mr Azhari, I hand the call over to you. Thank you very much. Thank you Rahul. Hello everyone. Thank you for joining us today for this call. I will say a few words about the general situation in Lebanon and a bit on Egypt since it is our second-most important market. I will then conclude with a briefing on BLOM s results. Since our QIII conference call, we have witnessed important developments towards the end of last year in Lebanon. Our prime minister, at the start of November, submitted his resignation from Saudi Arabia. This resignation was not accepted by the President because it was communicated from Saudi Arabia. When our prime minister returned to Lebanon, he was convinced to retract his resignation and stay in power. During this period, we had some uncertainty in the market that resulted in some capital outflows and exchange from Lebanese pound deposits to dollars. People felt worried and that affected the market to some extent. As a result, the Central Bank intervened by incentivizing banks to offer higher interest rates to Lebanese pound depositors. Effectively, the Central Bank offered banks higher interest rates on their deposits at the Central Bank, subject to banks doing the same to their Lebanese ponds depositors. Following the Prime Minister s resignation retraction, market sentiment improved and deposit dollarization reversed. This was also helped by the government tendering the oil/gas exploration to ENI, Total and Novatek which was viewed as a positive development. Moreover, the government is preparing for three international donor conferences to help Lebanon. The first will be held mid-march in Rome, and is geared to help the Lebanese army. The second conference will be held in Paris at the beginning of April. It is economic in nature where multinational agencies/countries will extend low interest loans to fund infrastructure projects in Lebanon. And there is a third conference that will be held in Brussels to tackle the plight of Syrian refugees on host countries in the Levant region. Additionally, parliamentary elections are due in early May in accordance to a new proportional election law that will be more representative. In terms of growth in Lebanon, IMF figures for 2017 stood at 1.5% and expected growth for 2018 is around 2%. We are still witnessing low growth levels as a result of the ongoing geopolitical situation in the region. Moving on to Egypt, we have been seeing better figures. Inflation has come down and they lowered interest rates by 1%. Also, GDP growth came higher than what was initially expected at slightly more than 5%. I think, overall, there is a positive sentiment and foreign currency reserves have improved to historic highs. A lot of foreign investment is flowing into treasury 1
bills but also to different projects in Egypt. So we are seeing a much better situation on the economic front in Egypt. For BLOM bank itself, our assets in 2017 grew by about 10.2% and reached $32.5 billion. Deposits attained $26.6 billion, which is up 7.4% on the year before. Loans reached $7.5 billion, up by 5.4%. Our equity stood around $3 billion. The return on equity is slightly more than 17.2%. Cost to income, compared to other listed banks, is the lowest at 34.4%. And our capital adequacy is at around 18.5%. Part of the asset growth in Lebanon resulted from the HSBC acquisition that we finalized in June of last year. Another factor is the growth in the balance sheet in Egypt which grew by around 28% in dollar terms. I guess if you look at our $3 billion growth in assets, $2.4 billion came from Lebanon and another $400 million from Egypt. On the other hand, deposits grew by around 7.4% which were also helped by the HSBC acquisition in Lebanon. Additionally, we had a growth of about 30% in Egypt. The same applies to the 3% increase in lending growth in Lebanon and 37% in Egypt. Maybe a few words on taxes. We ve discussed them before, but in October the law was passed for the increase in taxes and the corporate tax rose from 15% to 17%. Also, there is now double taxation on our treasury bills. We used to pay tax on treasury bills and then deduct it from our income tax. But this is no longer the case. Furthermore, the new tax bill allows for bank deposits at the central bank, in addition to interbank deposits, to be taxed. But this is being reconsidered at the moment and might accordingly be amended with the passing of the proposed budget. I m not going to take longer and would prefer to open it up to questions and answers. Maybe while we wait for some questions to come through, I could ask one from my side. Mr Azhari, could you talk a little bit about the competitive environment in Lebanese banking? Are you seeing any tighter competition? How do you think the appetite for growth amongst your competitors is at the moment? If we look at the three major listed banks BLOM, Audi and Byblos BLOM had growth in assets of 10%, another 7% in deposits, and 5% in loans. Individually, Audi had 1% drop in assets, 7% decrease in deposits and about 5% decline in loans. Byblos had about 5% growth in deposits, 9% rise in assets, and 5% increase in loans. So I guess Byblos was close to us, slightly less but with an acceptable growth. As for Audi, I think they were affected by their Turkish operations. In terms of returns, we still have by far the highest return on equity among the listed banks, at 17.2%. Audi has around 13.4% and Byblos 9.5%. Our cost to income is around 34%, compared to Audi and Byblos at about 50% each. So we are comfortable and we are still the leaders in terms of retail banking where we have approximately 26% of the car loan market compared to Audi at 11%. In the housing loan segment, we are also leaders with around 15% market share compared to Byblos at 9%. If we are to compare our Lebanese balance sheets, we surpassed Audi as the biggest bank in Lebanon. So our market share is growing and our position in Lebanon is relatively solid. We face competition, but I think we have a better cost structure and outcompete the rest in the Lebanese market. Just a short follow-up on that. Do you think this situation will continue in 2018? Perhaps Audi will be more focused on Lebanon than it was in the recent past? AUDI is trying to improve in Lebanon. There s a new deputy CEO from Greece who is trying to cut costs, not only in Lebanon but also in Turkey and other places. So there are efforts in 2
that sense which is good. As for Byblos, their profitability ratios are still relatively low. I think they need to make more effort on that front. At the BLOM bank level, we are comfortable for 2018 where we still have good prospects. Having said that and in terms of lending growth, I don t think it will be as strong as previous years. As I mentioned earlier, interest rates have gone up and there is little appetite by individuals, corporates, and retail to take more loans. So I think we will not see a strong growth in lending for 2018. Aybek Islamov: Aybek Islamov: Thank you. Do we have any questions Operator? We do have some questions on the phone lines. The first question comes from the line of Aybek Islamov from HSBC. Please go ahead. Thank you for the call Mr Azhari. I have a couple of questions. The first one is on Egypt. You made some comments that you see a fairly strong growth momentum there in terms of loan book. Could you comment on the nature of the loan demand? Are you lending in foreign or in local currency? The second question is a bit of macro with regards to Lebanon. How would you see the impact of rising US rates on the macro stability, on the macro equation in terms of debt servicing for the government in particular? Also with regards to Lebanon, what do you see on the capital flow side? How supportive are capital inflows today for the FX reserves and the balance of payments, etc? Thank you. In terms of growth and lending in Egypt, definitely we are seeing an increase in lending to the agriculture and manufacturing sectors. This is because after the devaluation, the labor force became cheaper and Egyptian exports are now more competitive. Most of our lending is in local currency because it s very restrictive to lend in foreign currency. With the expected decrease in Egyptian interest rates over the course of this year, loan growth is going to be strong, and mostly in local currency. With regards to your question about the impact of rising US rates on Lebanon, it is a fact that Lebanon s risk premium these days is high. The spread over US is more than 400 basis points. Accordingly, the challenge is in reducing Lebanon s risk premium. If the donor conferences are successful, we might be able to witness that, even though US rates are increasing. For example, if you look at Egypt and Lebanon, Egypt was able to borrow at lower rates than where Lebanese bonds stand right now because of the improving situation in Egypt. So if Lebanon can lower its risk premium, we can accommodate the increase in US rates. Okay, thank you. On Egypt, how do you expect the margin to respond to a fairly rapid drop in inflation over the next 12 to 24 months? Do you think there s chance to sustain your NIM in Egypt at all? For example, since you are pushing more into lending, then your loan to asset ratio will be going up, thus compensating for the drop in security yields. Secondly, what s your sense for the NIM outlook in Lebanon given the increase in the US dollar rates? In Egypt, the reserve requirement was increased from 10% to 14%, and this definitely had a negative impact on NIMs because reserve requirements with the central bank have zero yield. But with the growth of our lending and with the subsequent improvement in margins, we still expect to see better results than last year, especially due to the growth of the associated fees and commissions. Also last year, we absorbed the full impact of the currency devaluation. In terms of the net interest margin in Lebanon, we will be able to preserve or even slightly improve it. The reason is because the Central Bank is incentivizing banks by 3
offering them higher interest rates on their Lebanese Pound deposits with the Central Bank. This is subject to banks extending the same treatment to Lebanese Pounds depositors. Plus, the Central bank is running a scheme where if you bring them dollars, you can borrow in Lebanese pounds and buy higher yielding treasury bills. So you can also make an extra margin there because they will finance your purchase of treasury bills in Lebanese pounds. So the operations of the Central Bank are improving the net interest margin for local banks. Aybek Islamov: Deborah Rees: Deborah Rees: Thank you very much. The next question comes from the line of Deborah Rees calling from Exotix. Please, go ahead. Thank you very much for a very interesting call. As you say, you ve been expending market share in Lebanon. If one assumes that in the medium-term it may be hard to get more market share in Lebanon, clearly there are things that you can still do in Egypt. I would be interested for a bit of color from you in terms of how you position yourselves in Egypt relative to other banks. But my real question remains whether there is scope for you in other markets altogether? For sure we see potential in Egypt. It s a big market with improving prospects especially that they have started extracting gas. So the whole situation is improving in terms of industry, agriculture, and natural resources. We are also expanding our network of new branches. It s the biggest Arab country and we see a big potential in Egypt. We are also present in other markets but the only place where we have a full license is Jordan. In other markets, we are niche-oriented such as the UAE where we are limited to operating two branches. In Saudi Arabia, we have an investment bank. In Qatar, we are present in the Qatar Financial Center with limited operations. Unless they open up in Saudi Arabia and allow us to have a commercial license, we are relatively limited in terms of potential growth across our subsidiaries. As for Europe, we have niche presence in Paris, Geneva, and London where we serve Lebanese and Arab customers. In brief, we have the potential to grow outside but the most important market for us is currently Egypt. Thank you. The next question comes from the line of Jerry Fieddler calling from Terra Partners Asset Management. Please go ahead. Hello, thank you for this presentation, and congratulations for the good results in 2017. I have a few questions. I would like to ask about - because the notes to the financial statements for the last financial year have not been released yet - the number of shares held in treasury at the end of the last fiscal year? We had less than 1% of our outstanding shares at about LP 8.4 million worth of shares. In regards to the increasing commitment to lend, do you expect a recovery in loan demand domestically or rather abroad? Yes. We expect the growth in lending to come from abroad and mostly from Egypt. Also with other commitments in the off-balance sheet items, there is a huge increase from $48 million at the end of fiscal year 2016 to nearly 1 billion at the end of last year. Could you talk just a little bit about this increase? 4
Gokce Bulut: This is partly due to the increase of the LC/LG business after the HSBC acquisition. HSBC has been very active in LGs and LCs and I guess they have doubled in terms of off-balance sheet in terms of LCs and LGs. As for the rest of the increase, we will check and revert back to you. Another question is what s behind the difference between non-performing loans coverage of 154% that was announced compared to 126% that is stated on page four of the 2017 investor presentation. There are different coverages. You have the cash coverage, you have real estate coverage and you have general provisions for lending. So if you add the three of them, it s 154%. I think without the real estate, it s around 126%. I also noticed a drop of 10% in fee income in addition to the shrinking of the asset management business by nearly 20%. Is this the main reason behind the fee income drop? Or what caused a moderate drop in the fee income as compared to 2016? Asset management business runs different funds across the region where the NAVs have been adversely affected by the drop in investment climate in these markets. But on the other hand, drop in fees has been offset by the rise in custody business that went up from $7.1 to $7.8 billion. Yes of course. The next question is about the currency composition of deposits for the last quarter of 2017? Within the investor presentation, I can see only the ending balance or the composition of deposits by currency at the end of the third quarter. Is this composition also available at the end of December 2017? And if so, are there any significant changes as compared to the third quarter? I don t think it s significant. There is always a lag in collecting the information from our subsidiaries and I think in the next few days they will update the composition. But there are no major changes from the nine-month figure. The last question is: what is the amount of dividend per share that the board of directors will declare for the last fiscal year? We have a Board meeting by mid March where it will be discussed. We will then propose it to the General Assembly that will be held in April. So it s not yet agreed upon. Thank you very much. The next question comes from the line of Gokce Bulut from LGM Investments. Please go ahead. Hi, thank you very much for the call. I want to ask two questions. If you could maybe talk about your views on the Lebanese Pound, how sustainable is the peg? The second is more specifically about the impact of the peg being broken and potential devaluation. What kind of test you have you done to see that on your balance sheet and various other factors that might have a negative impact. Thank you. The Central Bank policy has been clear. They believe that devaluation is not helpful for the economy and accordingly the Central Bank will maintain the peg. Lately, the Central Bank s foreign assets have been improving and are currently at $44 billion. This excludes gold reserves which are estimated at $13 billion. So the Central Bank has ample foreign currency reserves to defend the peg. The Central Bank policy in defending the peg is based on the fact 5
that Lebanon is not an exporting country and devaluation will not help the economy. The Central Bank has the means to defend the currency and has successfully intervened in the past, including last November when the Prime Minister resigned. I don t see in the short term any type of devaluation. As a bank, we run stress-testing scenarios. What we can tell you is that the size of our Lebanese Pound balance sheet will become smaller in a devaluation scenario. We run two different balance sheets: we have a Lebanese pound balance sheet and a dollar balance sheet and we don t take any positions. The only position we have is our equity where we are allowed to hedge 60% of it in foreign currency because part of our balance sheet is in dollars. Deposits that we get in Lebanese pounds, we lend out and the deposits we receive in dollars, we can either lend or invest. So we don t have a currency position. With any devaluation, there will be an impact on the general situation. But I think with our comfortable capital adequacy level, we will not need any capital injection if there is any type of devaluation. Gokce Bulut: Nadine Mezher: Thank you. The next question comes from the line of Nadine Mezher calling from FFA Private Bank. Please, go ahead. Hello, good afternoon. What is the outlook for Lebanon and Egypt in terms of nonperforming loans for 2018? And what is BLOM Bank s NIMs target for this year as well? I also have another question. In the context of the forthcoming donor conferences, is there any appetite for BLOM Bank to participate in infrastructure financing, especially through the Public and Private Partnership framework? In terms of NPL, they increased in 2011 with the start of the Syrian conflict but have been gradually declining ever since. We are comfortable with the situation and don t see a problem in Lebanon. In Egypt, I expected - with the devaluation and higher interest rates - to see an uptrend in NPLs, but thankfully they did not. On the contrary, we are witnessing a drop in NPLs. In terms of net interest margin, we will be able in Lebanon to maintain or slightly improve the net interest margin. In Egypt, I think the increase in the reserve requirement will slightly affect the net interest margin, but will be absorbed in the overall growth of the balance sheet and lending. In terms of our appetite for infrastructure projects, in general we don t engage in long-term infrastructure financing because they are mostly supposed to be the responsibility of investment banks, such as the EBRD, EIB and WB. Maybe we can intervene if they need any type of short to medium-term facilities for those types of projects. But certainly not for the 20-30 year lending that might be required for long-term infrastructure projects. Nadine Mezher: Thank you. We have no further questions in the queue, so I ll hand the call back over to you for any concluding remarks. Thanks Mr Azhari for your insightful comments, welcome as ever, and thanks to all the participants for joining in this interactive session. If you do have any follow-up questions, please don t hesitate to contact either myself or Alexandre Mouradian who is head of Investor Relations at BLOM Bank. Thank you and goodbye. Thank you 6