BLOM Bank QI 2018 Earnings Conference Call Hosted by Exotix 22 May 2018 Hello and welcome to BLOM Bank Q1 2018 results conference call. My name is Amelia and I'll be your coordinator for today's conference. For the duration of the call you will be on listen-only mode. However you will have the opportunity to ask questions at the end of the conference. If at any point you require assistance, please press star zero on your telephone keypad and you'll be connected to an operator. I am now handing you over to your host, Rahul Shah, to begin today's conference. Thank you. Thank you operator. Good afternoon everyone and welcome to today's BLOM Bank Q1 Results call. My name is Rahul Shah and on behalf of Exotix Capital I'm pleased to introduce our speaker for today's event, Mr Saad Azhari, who is Chairman and General Manager of BLOM Bank. As in previous calls we will start with some prepared remarks from Mr Azhari before moving to the Q&A session. Please note that the Q1 investor presentation is available on the BLOM Bank Investor Relations site. Mr Azhari, I'd now like to hand the call over to you. Please go ahead. Good afternoon everyone. I will start by talking about the situation in Lebanon and then go over our first quarter results after which we'll open it to questions and answers. I will try to be brief. On the political front, Lebanon concluded the parliamentary elections on May 06 that were held according to the new proportional system. This resulted in a better representation of constituents in the parliament. It was also hailed a success since the last parliamentary elections were held nine years ago. The political situation has also improved because, after electing the President 18 months ago, we now have a new parliament in place. The formation of a new government will follow, and public institutions will start functioning better than before. This is regarded as a positive step. It is also important because we are looking forward for the new government to implement much needed reforms so we can start benefiting from the CEDRE donor conference that was held a month ago. Donors pledged about $11 Billion for various infrastructure projects across Lebanon. Accordingly, we are optimistic that we have the potential to benefit from the CEDRES conference, in addition to the oil&gas exploration prospects in the coming year. At the monetary front, the Central Bank s foreign assets have reached around $43 Billion and that excludes $12 Billion of gold reserves. 1
In parallel, we have lately witnessed an increase in interest rates on dollars which is not particular to Lebanon but rather across emerging markets. As such, interest rates on Lebanese Eurobonds have risen. Another relevant highlight is the Central Bank s swap operation two days ago with the Finance Ministry. Effectively, they moved debt from Lebanese pounds to dollars. The Central Bank now holds $5.5 Billion of new Eurobonds that the Ministry of Finance issued, of which $3 Billion will be offered for subscription. For reference, the current yield on Lebanese Eurobonds has risen to around 9% over the past months. Regionally, we are witnessing an improvement in our second most important market, Egypt. Egypt s credit rating has improved and the growth prospects of the economy are pretty good. At the group level, our first quarter profits for 2018 were $117 Million, up 4.3% from the first quarter of last year. Total assets reached around $33.2 Billion with a $3.1 Billion year on year increase. Deposits attained $26.7 Billion, representing an increase of around 6% on the first quarter of last year. Loans moved up to $7.6 Billion, up by 6.5% from the first quarter of 2017. We were also able to maintain our lead in performance ratios among local listed banks. We had a return on common equity of around 15.2%, cost to income of 37% and our capital adequacy is still relatively high at 18.5% compared to the 14.5% required locally. In terms of NPLs, the non-performing loans are stable at 3.2% and our coverage is around 130%, excluding the collective provisions that we have taken. Perhaps I need to highlight the reason behind the slight drop in net interest margin from 2.34% to 2.32%. This was mainly due to the rise in reserve requirements in Egypt from 10% to 14%. But we are expecting the net interest margin to pick up in the second quarter to the levels of last year or even slightly better. Also our cost to income was slightly higher in the first quarter which came on the backdrop of acquiring HSBC s local operations in June of last year. But as with NIMs, we expect the cost to income level to improve in the coming quarters. I would like now to open it up for questions and answers. Amelia, could you please open up the Q&A session? Yes. Ladies and gentlemen, if you would like to ask a question please press star one on your telephone keypad. If you change your mind and you want to withdraw your question, please press star two. You will be advised when to ask your question. Thank you. Perhaps Mr Azhari I could ask you a question. We've seen loan growth in Lebanon running at around 3% at the moment. You mentioned that the CEDRE conference in Paris opened the door to some infrastructure investment. What do you 2
think about the loan growth outlook given that context and also the scope for more active political decision making? Do you think that growth rate could improve? We are now expecting the formation of a new government that usually in Lebanon takes some time given its national unity identity. Normally, it will take two months for the formation of the government. Following that, the newly elected government has to carry out reforms as a prelude to receiving funding from donor countries. So to be realistic, we should not be expecting to see the flow of funds into investment projects before the end of 2018. Additionally, the prevailing high interest rates will dampen credit demand for the rest of the year. Accordingly, I think in Lebanon itself we are not going to see lending growth. On the other hand, we are witnessing loan growth in Egypt and some of our other foreign markets. Thank you very much. Given the limited balance sheet growth, do you expect your capital ratios to keep rising and what implications does that have for your dividend payout expectation? I guess in terms of opportunities, we are either going to lend to the private sector or increase our exposure to the sovereign and/or Central Bank. Those also have risk weightings with a requirement on capital. I don't think there will be a significant change in the composition of our balance sheet because we have a part that stays liquid abroad. The other part is Lebanese risk which is either on the private or government / Central Bank side. I believe that our capital adequacy will stay relatively stable and it will all depend on the improvement of profits for dividend payments. We have been in general distributing around 50% of our profits and this is our policy going forward. Temmy Ode: Thank you. We have a question through the line of Temmy Ode from Exotix. Please go ahead. Hi, thanks very much for taking the call and for your comments earlier. My question is just a follow-up question on Egypt. You had flagged up that most of your loan growth is likely to come from this country and I was wondering what do we think about target contributions from Egypt as well as margins given rates are coming down or are expected to come down quite sharply in Egypt? And then finally, will you need to make additional investments within Egypt to basically hit your loan growth targets from there? As you said, we are seeing good growth in Egypt. We have seen year on year growth of about 22% in dollar terms in our assets. If you take loans, we have witnessed also around 42% growth in terms of lending. We expect to see an improvement in profits too as we are expanding by opening new branches and extending the branch network. 3
We don't have the intention to make new acquisitions because it's difficult for us with an already established presence in the market. Generally, the policy of the Central Bank is to promote M&A activity among local Egyptian banks or foreign banks that don't have a presence in Egypt. So our growth is more organic in nature. Temmy Ode: Temmy Ode: Thank you. And if you could talk a bit about margins in Egypt. The net interest margin in the first quarter dropped to around 3.3%. It used to be 3.9%. As mentioned earlier, the reason behind the drop is the increase of reserve requirements from 10% to 14%. But we expect it to improve because it has already been priced in and will start rising again. As a result of the drop of our NIMs in Egypt, our consolidated NIMs went down from 2.34% to 2.32% but we expect a reversal in the second quarter. Thanks very much. The next question comes from the line of Christine Phillipps from Alliance Bernstein. Thank you for hosting this call this morning. I was just wondering if you could talk through, in a bit more detail the latest Central Bank swap operation. I dialled in a bit late to the call. So if you could just talk through the numbers and the estimated costs of that operation to the Central Bank and the outlook for the rest of the year and how you expect that to impact BLOM specifically. That would be very helpful. The Central Bank announced that there was a swap of $5.5 billion with the Lebanese governemnt. Effectively, the government issued $5.5 Billion worth of Eurobonds that the Central Bank recorded on their books. The Central Bank said that out of the $5.5 Billion, they are going to sell around three billion and keep the rest on their books. As such, the Central Bank s overall holdings of Eurobonds will total $7 Billion out of which $3 Billion will be sold, leaving a balance of $4 Billion by the end of this year. What happened is that the Central Bank has been paying government dues where the latter s dollar account at the Central Bank ran a deficit. As a result, the government issued the Eurobonds and covered their outstanding balance in US dollars at the Central Bank while maintaining a positive balance on their Lebanese pounds account. And I think they partly retired debt in Lebanese pounds. Moreover, the Central Bank extended loans to the government in Lebanese pounds at a low rate of 1%. Effectively, this is where the Central Bank has helped the government by granting them loans at a low rate. The cost to the Central Bank of granting the government low interest rate loans is difficult to measure because the Central Bank prints Lebanese pounds. Perhaps the direct consequence of money creation is inflation. But this will not affect the profitability of the Central Bank. And for that operation, were the local banks involved in any way or will the local banks be involved? 4
The Central Bank is willing to swap maturing Eurobonds held by the banks with the new Eurobonds that it acquired from the government. The same applies to maturing Central Bank CDs held by the banks. Alternatively, banks can purchase the Eurobonds from the Central Bank by bidding for them. The breakdown for bids and swaps will become available in the coming two weeks. I know this has been discussed but what rate would be expected for the swap between the Central Bank and the local banks? So they're selling three billion in exchange for these different instruments. Is the Central Bank selling it at a discount to the local banks? Do you have a sense of that? The Central Bank will be collecting bids. Frankly, I know that the bonds that they are offering - with ten year maturities - have a coupon of 7%. The 15 years is at around 8% and then the 16 years is at 8.2%. Given that the current yields on the Eurobonds are above 9%, I expect the bids to come at below par. A for the appetite of banks, you have to also factor in that the Central Bank has another operation that is still open and where banks can effectively get yields on five years at around 10%. The yields increase to 11% and 12% for seven and ten years of respective maturities. But with this operation, the Central Bank offers part of the interest in dollars which is somewhere between 5.5% - 6%. Additionally, the Central Bank extends low interest rate loans in Lebanese pounds that banks can reinvest in higher yielding Lebanese Pound instruments. So you get half of the interest in dollars and the other half in Lebanese pounds. So now the market yields are relatively close to where the Central Bank's offer is. It is better to have a Eurobond that pays all the interest in dollars than having an investment with the Central Bank where half the yield is in dollars and the rest of it in Lebanese Pounds. But at the same time the Central Bank risk is less than that of the sovereign. At the end, it boils down to the preference and risk appetite of each bank. Some banks prefer the liquidity of a Eurobond, still others opt for the security of a Central Bank investment instrument even though the yield is partly in Lebanese Pounds. We have to wait and see how everything is going to turn out. But I expect it to be close to the prices of the actual Eurobonds. Okay. So you don't think they will need to have it at a discount to get the operation done to incentivise the banks? Emerging market Eurobonds have dropped and we have seen the local Eurobond market drop as a consequence of that. It's now coming close to what the Central Bank has been offering. And the Central Bank is offering something which is half in dollars and half in Lebanese pounds, while the Eurobond is fully in dollars. 5
So I think the market, where it is right now, is reasonable compared to what the Central Bank is offering. Right. I guess my point is that if the Central Bank wants to get this done, they may have to sweeten the deal. The deal is that banks have to place a bid. Banks can place a bid at any price that suits them and the Central Bank will consider it along other bids. Let's say you agree that a 9.5% yield is good enough and you bid for the price based on that yield. Another bank will bid at 9.75%. So the Central Bank will assess the bids and will take the prices that are suitable for the Central Bank up to a certain limit. They might accept bids up to 10% yield. So we have to wait for the outcome of where the interest and price levels are. For example, if you take us as a bank, we prefer Central Bank exposure rather than the government. I know other banks prefer to have the liquidity of a Eurobond more than the deposit of a Central Bank because they have the option to borrow on the Eurobonds. Simply, they don t prefer to have a long-term deposit. There are different appetites and preferences. So we have to wait and see. But I expect that it is going to be close to where the current yields are right now for the Eurobonds. Is there any other announced operations for the rest of the year? The Central Bank Governor has highlighted that they will be selling $3 Billion. Okay. I guess in general, what do you think about the Central Bank's capacity to keep on doing this? In your perspective, is there a point at which the Central Bank will no longer have the capacity to do these types of swaps? Or how do you think about that? The Central Bank is content with these types of operations since it is shoring up their foreign currency reserves. Instead of having government debt in dollars as a current account, the Central Bank now owns Eurobonds that can be sold in the market. I think it is good that the government accepted to issue the Central Bank with Eurobonds to cover the government s outstanding debt at the Central Bank. It's an operation where the government is asking the Central Bank to take care of the government s future issuances by managing to sell it to local banks. Something that local investment banks were doing till now. Thank you. We have no further questions from the queue. Please be reminded, if you would like to ask a question, it's star one on your keypads now. Mr Azhari, while we wait for any final questions to come through, I had a question on your NPL ratio. Obviously it has been improving for a number of years but it looks to have stabilised, at least based on Q1. 6
Given how sluggish you see the loan growth outlook in Lebanon, do you think the NPL ratio could actually start picking up or are you still comfortable with a stable to improving trend? I think probably it will be stable around the level that we have right now. I don't see any major problems nor any major changes. Thank you very much. And more broadly, do you have any view on either return on assets or return on equity at the Group level for this year? If you look historically, we have always started with a lower return on equity in the first quarter that picks up towards the end of the year. I think we should be seeing the same thing this year. So the figure for RoE you have seen in the first quarter is going to improve during the year. Thank you very much. Do we have any final questions? No, there are no further questions in the queue. Okay, well in that case thank you very much, Mr Azhari, and thanks to all the participants for joining today's call. Thank you. Thank you for joining today's call. You may now disconnect your handsets. 7