Regionalization of the Lebanese Banking Industry in the Arab World Mr. Saad Azhari Chairman and General Manager,BLOM Bank Lebanese Banking Day in London November 10 th,2010 Peace of Mind
Agenda Table of Contents 1. Introduction 2. Opportunities and Challenges of Regional Expansion 3. Regional Expansion of Lebanese Banks 4. Case Study: BLOM Bank 5. Conclusion 1
1.Introduction
Introduction q The Arab banking system has shown impressive signss of in the past decade: - Growing at an average of 20%, with assets expected to reach more than $ 2.3 Trillion in 2010 - Maintaining a healthy capital to assets ratio in excess of 10%. - Navigating through the recent financial crisis, little affected by it. - Developing a universal banking model, while utilizing operations latest technologies and best international regulatory standards. - Expanding into regional markets, especially major Lebanese banks which have been very active and successful in their regional expansion, benefiting from the resurgence of Arab economic and banking activities and contributing to it. q This process of Arab banks, including Lebanese banks, regional and international expansion is seen as: - Driven by a proactive mindset to understand markets and the industry on a global or at least a regional basis. - No longer a reactive response to changing demand on the part of existing customers: banks going abroad only to serve home clients who have gone abroad. - Also important are Push Factors : saturation of home spreading of risk and diversification of revenue sources; exploiting more fully brand names and reputation. - And Pull Factors, prime among them, are liberalization policies that opened domestic banking systems to more foreign competition. 3
2. Opportunities & Challenges of Regional Expansion Expansion
Opportunities of Regional Expansion q Opportunities: - Proximity factors: common language and culture; rich network of business relationships; ease in replicating and spreading banking services in neighbouring Arab countries. - Expanding regional economy with high degree of economic integration:arab economy growing at more than 5% since year 2000; inter-arab trade at US$ 70 billion, FDI at US$34 billion, and remittances at US$18 billion. - Huge market potential: 340 million people, growing at 2% annually, with more than 50% of the population below 24 years old; Arab average of 778 bank accounts per 1000 adult against a global average of 1,217; similarly, Arab average of loan accounts of 235 compared to a global average of 325; and a huge projects market worth US$ 3 trillion. - Exploitation of economies of scale: in terms of product development, transaction processing, back office and control functions, as well as risk management. Also helps in aligning host and home countries with international standards and global banking practices. - Growing opportunities in Islamic banking : Islamic bank assets are more than US$350 billion, growing at 30% annually in the past 5 years.growth is expected to stay strong because of cultural/religious factors & rapid development of services, especially in the GCC. 5
Challenges of Regional Expansion q Challenges: - Restrictions on the legal and organisational forms of licenses: some countries allow foreign ownership of existing banks but not new licenses(egypt), while others grant licenses in specific activities only (investment banking in KSA), while other markets are still effectively closed (Kuwait).This is conductive to efficient and competitive allocation of expanding banks resources. - Strengthening expertise in areas other than commercial banking, especially investment banking; The demand for investment banking is bound to increase with economic growth and and as the Arab financial system becomes increasingly market-based. - Another area of required expertise is project financing: more than 60% of Arab project financing is controlled by international banks.hence, the need for more local expertise, especially since the demand for projects is on the rise particularly in energy and infrastructure. - Availability of credit bureaus: crucial to expanding foreign banks who are not familiar with local borrowers.credit bureaus reduce information costs and risk levels, besides making credit cheaper and more available to solvent borrowers. - Shortage of management and skilled personnel: expansion has thinned qualified staff across home and host banking units; and overcoming this challenge requires intensive internal and/or active external recruitment. - Expansion will lead to more competition among Arab banks, which will translate to better and more specialized services and/or more consolidation to reduce excess capacity and to enhance efficiency. 6
3. Regional Expansion of Lebanese Banks
Regional Expansion q Regional Expansion to Arab markets by Lebanese banks has been a strategic decision driven by push and pull factors: - On the push side, factors include saturation of domestic market(assets 3.5 times GDP), diversification of risk and revenues, and taking advantage of brand names and reputation. - On the pull side, factors include the large expatriate Lebanese community (450,000 in the Gulf alone), liberalization policies, expanding Arab business and market opportunities, and proximity factors. q The process has continued apace, even during the financial crisis.it has overcome many challenges, and is characterised by: - Provision of universal banking services, namely commercial, investment, and private banking besides insurance and brokerage. - 17 Lebanese banks with more than 250 banking and financial units (branches, subsidiaries, and representative offices) in 25 countries, 12 of them Arab. - Core of expansion has been to the Levant and the GCC.This is currently being consolidated, with an eye on new expansions in Africa. - Between 2007-2009, 2009, on average,close to 15% of profits and 18% of assets have come from foreign operations. For major expanding banks, the ratios are 20% and 25% respectively. 8
Regional Expansion Onshore Lebanese Banks Growing at an average of 18.5% in 2007-2009 2009 2008 2007 Assets($Bn) 115.3 94.3 82.2 Deposits($Bn) 95.8 77.8 67.5 Loans($Bn) 28.4 25.0 20.4 Profits($M) 1,197 1,068 850 ROAA(%) 1.09 1.16 1.04 ROAE(%) 15.49 15.4 13.42 No. of Banks 65 65 66 No. of Branches 902 878 864 Onshore+Offshore Lebanese Banks Growing at an average of 16.8% in 2007-2009 2009* 2008 2007 Assets($Bn) 137.7 114.1 101.1 Deposits($Bn) 112.7 92.3 81.3 Loans($Bn) 34.0 29.4 23.5 Profits($M) 1,411 1,218 962 ROAA(%) 1.12 1.13 1.02 ROAE(%) 13.2 13.2 11.79 * Estimated Expansion of Lebanese Banks Abroad 17 Lebanese banks in 25 countries Syria UAE KSA Qatar Egypt Jordan Sudan Europe Others Total Number of Units 62 9 2 2 56 34 12 56 21 254 9
4. Case Study: BLOM Bank
The Leading Banking Group In Lebanon q One of the oldest bank in Lebanon - Founded in 1951 q One of the most profitable bank in Lebanon - Net profit of $156.4m for H1-2010; $293.0m for 2009 q One of the largest banks in Lebanon - Total assets of $21.5bn for H1-2010; $20.7bn for 2009 q Universal banking model - Active in Corporate, Retail, Trade Finance, Private Banking, Investment Banking, Brokerage, Asset Management, Islamic Banking and Insurance. q Well positioned to capture regional growth - Present in KSA, Qatar, Abu Dhabi (Rep. Office), Egypt (25 branches), Jordan (7 branches), Syria (24 branches) and UAE (Dubai,Sharjah & Jabal Ali ). q Wide presence in Europe - Present in France, UK, Switzerland, Cyprus and Romania(5 branches) q Highest Credit Ratings in Lebanon - The highest national score rating Aa1.Lb from Moody s - Rated by Capital Intelligence, a Middle East specialized rating agency, BBB-, which is the highest financial strength rating in Lebanon q The most Awarded bank in Lebanon - Best Bank in Lebanon, from Global Finance- March 2010 - Best Bank in Syria, from Global Finance- March 2010 - Best Banking Group in Lebanon for 2010, from World Finance -Feb 2010 - Number 1 banking brand in Lebanon for 2010, from The Banker- Jan 2010 - Best Bank in the Middle East, from The Banker-Financial Times Group-Dec 2009 11
Proven, Profitable Track Record BLOM has successfully delivered consistent annual net income growth BLOM Net Income ($ in millions) CAGR: 17.9% 136.8 180.3 205 251.6 293.0 156.4 83.6 88.3 91.2 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 Source :Company Data 12
Growth Performancee CAGR:2002/ /2010 H1-2010/H1-2009(YOY) Assets 15.83% 10.76% Deposits 14.70% 11.90% Net Lending 21.20% 28.85% Retail Lending 34.80% 43.61% AUM 29.80% 7.63% CAGR:2002/ /2010 H1-2010/H1-2009(YOY) Profits 17.90% 13.11% EPS 15.40% 15.24% Fee Income 19.30% 19.32% 13
Key Indicators Ratio H1-2010 H1-2009 ROAA ROAE(Common) Cost-To-Income 1.48% 19.96% 35.46% 1.48% 20.13% 36.27% Net Interest Margin 2.19% 2.19% Overall liquidity 69.65% 73.23% LBP Liquidity 89.32% 91.00% FC Liquidity 61.02% 66.77% Capital Adequacy (Basel II) Loans to Deposits Gross Non-Performing/Gross Loans* 12.91% 24.82% (LBP 9.3%; FC 31.67%) 2.94% 13.01% 21.56 % (LBP 7.30 %; FC 26.83 %) 3.89% * Fully provisioned 14
Capital Position and Dividend Policy Tier I ratio (Under Basel II) stood at 12.56% in H1-2010; Shareholders' Equity to Assets(Average) stood at 8.33% in H1-2010 ($ in millions) 569 638 Tier I & Tier II Capital CAGR: 15.2% 762 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 Tier I 958 1,271 1,388 1,459 1,709 Tier II Earnings Per Common Share (US $) 1,759 Shareholders' Equity by Book Value ($m) H1-2010 2009 2008 2007 Total Shareholders Equity Less: Preferred Shares Minority Interests Tier II Dividends on Common Shares Dividends on Preferred Shares Shareholders Equity for Book Value Calculation 1,759 1,698 1,459 1,388 175 88 101 85 16 175 86 81 85 16 175 1,294 1,255 1,093 955 84 13 78 16 Dividend Payout Ratio (% ) 250 59 19 78 27 CAGR: 15.4 % $4.36 $4.36 $4.21 $6.09 $7.28 $8.22 $12.93 $13.74 $10.69 46 46 48 44 46 44 34 31 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010, Note: Adjusted EPS= (Net Income Preferred Shares Payments) / Weighted Average Number of common shares) 2002 2003 2004 2005 2006 2007 2008 2009 15
Business Lines Best Trade Finance offering in the Middle East for 2010, from Banker Middle East Best Trade Finance Bank in Lebanon for 2010, from Global Finance Corporate Trade Finance Retail Private Banking Investment Banking Brokerage Islamic Banking Insurance Asset Mgmt Research Lebanon Syria Egypt Jordan UAE Saudi Arabia Qatar Europe P P P P P P 2007 P P 2006 P P 2004 P P 2010 P P 2010 P P P P P 2006 P 2008 P 2009 2006 2006 2009 2010 2008 2010 2010 P H1-2009 : available business lines Retail Banking 13.3% Breakdown of Operating Income Investment & Private Banking 10.0% Insurance 3.2% Liquidity* 46.7% H1-2010 Retail Banking 15.7% Breakdown of Operating Income Investment & Private Banking 15.3% Insurance 2.7% Liquidity* 45.8% Corporate & Commercial Banking 26.8% Corporate & Commercial Banking 20.5% * Liquidity represents Treasury Bills, CD s, Bonds and deposits with banks. 16
International Strategy H1-2010 UAE 2.4% Breakdown of Net Income Jordan 2.7% Syria 5.6% Europe 5.0% Egypt 6.6% KSA (1.0%) Qatar (0.7%) Lebanon 79.4% Region q BLOM provides Full Banking Services in four key markets in the Middle East (Lebanon, Egypt, Syria, Jordan) q BLOM targets Full Banking Services through Trade Finance, Commercial, Retail, Corporate and Private Banking q BLOM provides specialized banking services in the Gulf: - Saudi Arabia for investment banking activities - Qatar for commercial and private banking activities - UAE for commercial and trade finance q BLOM enjoys competitive advantage over multinational banks in the region due to: - Common language and culture Branch International Expansion No. of Branches 67 71 69 75 64 58 52 55 58 47 37 28 2005 2006 2007 2008 2009 H1-2010 Lebanon Foreign Countries - Easy to replicate products and procedures - Existing Relationships - Geographic proximity Europe qblom has developed an extensive presence in Europe to capitalize on the success of its domestic business model and to promote synergies with the regional network through: - Its subsidiary BLOM BANK FRANCE present in Paris, London, the UAE (2 Branches &1 Rep. Office),Geneva (affiliate under the name of BLOM Bank Switzerland) as well as Romania (6 branches) - A direct branch in Cyprus BLOM Bank strategy is based on expansion in the region and the diversification of its services to become a leading regional bank while continuing to ensure Peace of Mind to its customers and stakeholders. 17
BLOM s Deposit Franchise BLOM BANK Has Built a Franchise in Deposit Gathering Total Deposits Total Deposits by Country ($ in millions) CAGR: 14.7% 17,970 18,677 15,108 13,737 11,731 10,161 9,033 7,686 6,215 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 H1-2010 UAE 1.9% Europe 6.1% Syria 8.5% Jordan 2.6% Egypt 5.3% Lebanon 75.6%,BILANBANQUES Total Deposits by Currency Loans to Deposits Ratio H1-2010 GBP 1.4% SYP 4.6% EGP 4.2% Othe rs 4.7% LBP 30.6% 16.03 15.15 15.62 16.44 16.93 20.18 23.04 22.37 24.82 EURO 5.9% USD 48.6% 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010, 18
Lending Business Growth of Total Net Lending Breakdown of Lending ($ in millions) CAGR: 21.2% H1-2010 Project Finance 8.1% Securities 2.3% Syndicated Loans 4.3% 996 1,376 1,411 1,670 1,986 2,772 3,481 4,019 4,636 Real Estate 5.9% SME's 16.2% Corporate 34.9% 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 H1-2010 Diversification by Region UAE 4.0% Jordan 5.8% Syria 12.2% Egypt 9.0% Europe 10.8% *Of which 9.8% offshore exposure. Qatar 0.2% Lebanon* 58.0%, As of March 31,2010 H1-2010 Total Net Lending By Currency EGP 8.0% GBP 1.5% SYP 11.7% EURO 2.4% Others 11.0% Retail 28.3% LBP 11.4% USD 54.0% 19
Retail Banking Best Retail Banking in the Middle East for 2010, from East The Biggest Market Share in Lebanon in Car & Housing Loans % of operating income Growth of Retail Lending Share of Retail Loans ($ in millions) 119.6 141.6 172.3 224.6 345.8 562.6 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 (Net retail loans) H1-2009 Retail Loans Distribution by Product Credit Cards 4.0% CAGR: 34.8% 845.3 1,068.0 1,304.0 LEBANON EGYPT SYRIA JORDAN EUROPE 33.88% 33.19% 29.33% 24.54% 26.62% 26.54% 41.20% 47.55% 16.81% 14.36% 10.81% 2.71% 69.14% 57.03% 48.74% 40.83% - - - -, *Net Retail as % of total Loans H1-2010 H1-2010 2009 2008 2007 TOTAL* 28.13% 26.57% 24.28% 21.34% Retail Loans Distribution by Product Credit Cards 3.0% Housing Loans 35.3% Car Loans 46.1% Housing Loans 39.5% Car Loans 44.2% Pers onal Loans 14.6% Personal Loans 13.3% 20
Breakdown of Assets Total Assets of $ 21.5 Billion as of H1-2010 Total Assets Breakdown of Assets by Country H1-2010 Loans 21.5% Securities 28.2% Others 2.7% Cash & Central Bank 30.1% Interbank 17.5% H1-2010 Jordan 2.9% Syria 8.4% UAE 2.1% Egypt 6.0% Europe 6.8% KSA 0.2% Qatar 0.1% Le banon 73.5% Breakdown of FC Assets Breakdown of LBP Assets H1-2010 Corporate securit ies 8.8% Loans 27.4% Government Securit ies 13.2% Other Assets 2.7% Cash & Central Bank 23.1% Interbank 24.8% H1-2010 Government Securities 42.3% Loans 8.1% Other Assets 2.6% Interbank 1.0% Cash & Central Bank 46.0% 21
A Growing Interest Income Stream % of operating income Net Interest Income Components of Interest Income ($ in millions) CAGR:15.4% 182 148 153 157 271 311 394 419 232 H1-2010 Loans 29.2% Government Securities 31.6% 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 Corporate Securities 31.3% Interbank Deposits 7.9% Net Interest Margin USD Interbank & Deposits 2.34% 2.13% 1.75% 1.77% 2.13% 2.03% 2.42% 2.18% 2.19% 4.30% 5.19% 3.70% 3.88% 3.20% 4.74% 3.57% 1.62% 1.80% 1.20% 5.32% 3.69% 5.02% 2.93% 3.20% 2.91% 0.69% 0.31% 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 Average Cost of USD Deposits Average LIBOR 3m, Reuters 22
A Recurring Fee Income Stream % of operating income Fee Income Ratio of Fee Income to Operating Income ($ in millions) 38 40 49 79 75 93 115 145 78 30.27% 20.70% 23.78% 25.12% 21.67% 23.50% 22.62% 25.27% 2002 2003 2004 2005 2006 2007 2008 2009 H1-2010 H1-2010 Fee Income Breakdown by Region UAE 4.1% Egypt 13.1% Europe 9.9% Syria 10.3% Jordan 2.3% KSA 0.1% Lebanon 60.2% H1-2010 2003 2004 2005 2006 2007 2008 2009 H1-2010 Fee Income Breakdown by Type Investment & Private Banking 60.2% Insurance 5.0% Corporate & Commercial Banking 26.1% Retail 8.7% 23
Peer Group Analysis Net Income ROAA ROAE(Common) ($ in millions) 156 36.5% 161 45.7% 49.0% 72 19.96% 1.48% 16.26% 1.20% 12.93% 1.03% BLOM Audi-Saradar Byblos Net Profits Cost-to-Income Ratio B LO M A UD I B Y B L O S ROAE ROAA,Audi Bank and Byblos Bank; As of June 30, 2010,Audi Bank and Byblos Bank; As of June 30, 2010 P/B & P/E Volatility of Return Comparison 6. 7 2 9. 6 6 7. 6 8 55.6 30.1 52.8 35.9 26.7 42.0 1. 3 9 1. 7 5 1. 1 1 B lo m A u d i B y b lo s P r ic e to N e t B o o k P r ic e to E a r n i n g s Source:Company Data,Audi Bank and Byblos Bank Prices: BLOM GDR ($92.40) AUDI GDR ($8.50), Byblos ($1.80) prices as of August 3rd,2010 and based on H1-2010 results BLOM AUDI BYBLOS Mean Coefficient of Variation(CV) BLOM has the lowest volatility(risk) in comparison to the amount of return Source:Company Data,Audi Bank and Byblos Bank *Mean-Average quarterly return Q1 2005-H1 2010 *(CV) measures the quarterly Standard Deviation/Mean 24
Regional Peer Group Analysis BLOM is the only bank among its 3 major competitors in the Middle East with consistently increasing profits In USD Millions 2007 Profits 2008 2009 BLOM 204.7 Arab Bank 775.0 251.6 293.0 840.0 575.5 NBK Ahli United Bank 954.0 359.8 890.0 925.0 309.7 211.1 ROAE 2007 BLOM 17.37% Arab Bank 12.18% NBK 22.80% Ahli United Bank 15.36% 2008 2009 20.09% 21.31% 11.74% 8.00% 16.40% 16.50% 11.88% 11.64% BLOM Bank Capacity to generate respectable earnings on a consistent and sustained basis is unique among prime regional banks with a comparable geographical presence 25
Clear Board & Management Links to Subsidiaries Group Chairman BLOM Bank Board Group Risk & Control Oversight Board Audit Committee BLOM Bank General Management Board Risk Management Committee Management Oversight Business Plans by Entities Group Entities Country Managers Foreign Branches & Subsidiaries Committee Audit + Risk Reports by Entity Financial Evaluation + Performance by Entity BLOM Bank Board and general management have various channels to maintain oversight capacity on the Group Level: 1- Board:Through the Board Audit Committee and Board Risk Management Committee that communicate all control and risk issues to the Board. Also, through the Group Chairman who, in line with the Bank s Corporate Governance Code, evaluates the performance of Group entities and communicates his remarks to BLOM Bank s Board of Directors. 2- General Management: By direct link to each country manager and by reports channeled through the Foreign Branches & Subsidiaries Committee. 26
Oversight of Risk & Control Functions at Group Level BLOM LEBANON (BLOM Bank + Blominvest) Risk Management Internal Audit Financial Control BSO BLOM Egypt BLOM Jordan BLOM France BLOM Switzerland BLOM Qatar Blominvest KSA Paris London UAE Romania Each Group entity has its own Risk Management, Internal Audit and Financial Control Departments that are supervised by and report to Group Head Office. This is backed-up by regular visits from Group Head Office representatives in these functions to each entity. 27
Financials by Selected Countries Strong potential growth of assets, deposits, loans, and branches in markets where BLOM is a local bank (Assets, deposits & loans are in $ millions) 8,846 783 45 7,490 9,905 7,859 Lebanon 11,290 8,863 871 1,404 50 53 12,847 10,551 1,715 56 14,554 12,440 2,148 20 05 2 00 6 200 7 2 008 20 09 N o.o f B ran che s T o ta l Lo an s T o ta l D ep o sits T o ta l A s set s 58 (Assets, deposits & loans are in $ millions) 7 475 83 394 975 882 10 BSO 1,326 1,196 126 278 12 1,501 1,372 391 17 1,609 1,476 431 23 2 005 20 06 20 07 200 8 2 009 N o.o f B ran che s T o ta l Lo an s T o ta l D ep o sits T o ta l A s set s (Assets, deposits & loans are in $ millions) Egypt (Assets, deposits & loans are in $ millions) Jordan 1,496 1,111 1,164 701 854 893 930 1,262 679 543 306 287 354 374 8 216 12 24 24 25 2 005 20 06 20 07 20 08 200 9 N o.o f B ran che s T o ta l Lo an s T o ta l D ep o sits T o ta l A s set s 579 488 279 308 461 201 193 167 228 263 125 168 85 101 41 6 6 7 2 3 2 005 20 06 20 07 20 08 200 9 N o.o f B ran che s T o ta l Lo an s T o ta l D ep o sits T o ta l A s set s 28
5.Conclusion
Agenda Conclusion - Lebanese banks have been able to transform their domestic success to a growing success in their regional expansion. - Although success has been achieved across various business lines at the regional level, expanding Lebanesee banks need to further their success in investment banking and project financing and are yet to introduce Islamic banking. - BLOM Bank has been a Leader both in Lebanon and in overseas expansion, driven by prudent management and a strong management team. 30
Disclaimer The information contained in this presentation has been prepared by BLOM Bank.It has not been fully verified and is subject to material updating, revision and further amendment. No presentation,express or implied, is made as to the fairness, accuracy, completeness or correctness of information contained in this presentation, including the accuracy, likelihood of achievement or reasonableness of any forecasts, prospects, synergies, returns, benefits or statements in relation to future matters contained in the presentation( Forward-looking statements ).Such forward-looking statements are by their nature subject to significant uncertainties and contingencies and are based on a number or estimates or assumptions that are subject to change(ad in many cases are outside the control of BLOM Bank and its directors) which may cause the actual results or performance of BLOM Bank to be materially different from any future results or performance expressed or implied by such forward looking statements. To the maximum extent permitted by law, BLOM disclaims any responsibility for the accuracy or completeness of any information contained in this presentation including any forward-looking statements and disclaims any responsibility to update or revise any information or forward-looking statement to reflect any change in BLOM Bank s financial condition, status or affairs or any change in the events, conditions or circumstances on which a statement is based. This presentation provides information in summary form only and is not intended to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account investment objectives, financial situation or needs of any particular investor. To the maximum extent permitted by law,neither BLOM Bank nor its related bodies corporate, Directors, employees or agents, nor any other person, accepts any liability, including, without limitation, liability arising from fault or negligence, for any direct, indirect or consequential loss arising from the use of this presentation or its contents or otherwise in connection with it. This presentation should be read in conjunction with other publicity available material.further information including historical results and a description of the activities of BLOM Bank is available on our website, www.blom.com.lb 31