INTERIM FINANCIAL REPORT
END-MARCH 2023
(Unaudited)
Interim Report March 2023 | Table of Contents |
Table of Contents
01 Management Discussion and Analysis | 4 |
1.0. Basis of Presentation | 6 |
2.0. Operating Environment | 8 |
3.0. Consolidated Financial Condition | 9 |
3.1. Asset Allocation | 12 |
3.2. Funding Sources | 20 |
3.3. Group Results of Operations | 23 |
02 Interim Condensed Consolidated Financial Statements
(Unaudited) | 26 |
Interim Condensed Consolidated Income Statement | 29 |
Interim Condensed Consolidated Statement of Comprehensive Income | 30 |
Interim Condensed Consolidated Statement of Financial Position | 31 |
Interim Condensed Consolidated Statement of Changes in Equity | 32 |
Notes to the Interim Condensed Consolidated Financial Statements | 34 |
Notes' Index | 35 |
Notes | 36 |
03 | Addresses | 80 | |
1.0. | Lebanon | 82 | |
Bank Audi sal | 82 | ||
SOLIFAC sal | 84 | ||
2.0. | Turkey | 84 | |
Odea Bank A.Ş. | 84 | ||
3.0. | Cyprus | 85 | |
BAPB Holding Limited | 85 | ||
4.0. | Switzerland | 85 | |
Banque Audi (Suisse) SA | 85 | ||
5.0. | Saudi Arabia | 85 | |
Audi Capital (KSA) cjsc | 85 | ||
60. | Qatar | 85 | |
Bank Audi LLC | 85 | ||
7.0. | France | 85 | |
Bank Audi France sa | 85 |
2 | 3 |
01
MANAGEMENT
DISCUSSION & ANALYSIS
Interim Report March 2023
Management Discussion & Analysis
1.0. Basis of Presentation
In mid-2021, BdL Circular 158 was issued defining the mechanism for the gradual settlement of foreign currency deposits up to an amount of USD 50,000 based on several eligibility criteria. Eligible funds will be
decision is subject to appeal to the Supreme Disciplinary Authority. At present, the case is with the Judge of Instructions, and Management and its legal counsels are in the opinion that the case will be dismissed
The following discussion and analysis has been prepared by the Bank's Management based upon the Interim Financial Statements which are included in the following section of this report. The selected financial and operating data set forth below has been subject to rounding, extracted without material adjustment from the Interim Financial Statements. It should be read in conjunction with, and is qualified in its entirety, by the 2022 Annual Report (audited) and the Interim Financial Statements in the first quarter of 2023 (unaudited), including the respective notes thereto.
The Bank's Annual and Interim Financial Statements have been prepared in accordance with standards issued or adopted by the International Accounting Standards (IFRS) Board and interpretations issued by the International Financial Reporting Interpretations (IAS) Committee, the general accounting plan for banks in Lebanon, and the regulations of the Central Bank of Lebanon, the Banking Control Commission (BCC) and Lebanese Capital Market Authority (CMA). Such Interim Financial Statements include the results of the Bank and its consolidated subsidiaries as listed in Note 2.4 to the enclosed Interim Financial Statements as at end-March 2023.
Since late October 2019, Lebanon has been facing a very complex political, financial, economic and monetary crisis unprecedented in scale, which was ranked by the World Bank to be in the top three "most severe crises episodes globally since the mid-nineteenth century". The prolonged inaction by the authorities, compounded by the outbreak of the COVID-19 pandemic and the explosion of the Beirut Port in August 2020, has exacerbated the fallouts, putting the country in deep recession while severely impacting Lebanese banks' operations and financial standing. National losses have been assessed in 2022 at circa USD 70 billion.
By common local and international consensus, the government of Lebanon needs to adopt and implement a credible and comprehensive macro-financial reform program to address, among others, the systemic failure of the financial and banking sectors caused by this crisis. On 20 May 2022, the Lebanese government adopted a resolution plan led by the IMF and subject to the approval of its Executive Board. It still needs to be ratified by the Lebanese parliament. The plan includes several measures that are prerequisites to unlock funds, that could help pull the country out of a three-year financial meltdown. As of date, the parliament approved the reformed bank secrecy law and the 2022 budget while remaining measures are still pending.
While not much progress was achieved on those fronts, the IMF issued in March 2023 the concluding statement of its 2023 Article IV Mission. It says Lebanon is at a particularly difficult juncture. For over three years, it has been facing an unprecedented crisis, with severe economic dislocation, a dramatic depreciation of the Lebanese Lira and triple-digit inflation that have had a staggering impact on people's lives and livelihoods. Unemployment and emigration have increased sharply, and poverty is at historically high levels. The provision of basic services like electricity, public health, and public education have been severely disrupted, and essential social support programs and public investment have collapsed. More broadly, capacity in public administration has been critically weakened. Banks are unable to extend credit to the economy and bank deposits are mostly inaccessible to customers. The presence of a large number of refugees exacerbates Lebanon's challenges.
Within this environment, the persisting absence of a clear resolution roadmap for the Lebanese Crisis continues to prevent Management from estimating in a true and fair manner, and as per IFRS, the adverse impact of those matters on the Bank's financial position and equity, which it anticipates to be material. In particular, Management wishes to draw attention to the following key points that carry significant uncertainties with potential material impact on the future financial position of the Bank:
- The impact of the valuation of assets and liabilities in foreign currencies is expected to be significant once the revamping of the peg is implemented by the Lebanese government, as seems highly likely.
-
Loss allowances on assets held at the Central Bank of Lebanon and the portfolio of Lebanese government securities are set at very low levels and considered insufficient given the underlying risks of those assets.
Should an adjustment become necessary, the impact is expected to be pervasive. - A further deterioration of the credit quality of the loan portfolio as a result of the persisting negative economic conditions and the deepening recession may reveal additional future embedded losses.
- Potential restatement of published financial statements resulting from the use of a functional currency (LBP) related to a hyperinflationary economy as per IAS 29.
- Management has concerns about the effects that the above matters will have on the equity of the Group and the recapitalisation needs that will arise once the necessary adjustments are determined and recorded.
Based on the above, the external auditors expressed again an adverse opinion on the 2022 financial statements.
As per regulatory requirements, the Bank maintains its accounts in Lebanese Pounds (LBP). Nonetheless, all figures presented in the following MD&A are expressed in US Dollars ("USD"), unless specifically otherwise stated. The ensuing difficulty in accessing foreign currencies led to the emergence of a parallel market to the official exchange rate whereby the price to access foreign currencies has been increasing constantly, deviating significantly from the official exchange rate of LBP 1,507.5 per USD prevailing till end-December 2022. In February 2023, the Central Bank of Lebanon adjusted the official exchange rate from LBP 1,507.5 to LBP 15,000 to the US Dollar. The discrepancy of the market rates relative to the official rate has resulted in an uncontrolled rise in prices and the incessant de facto depreciation of the Lebanese Pound, driving high inflation and an uncontrolled rise in the consumer price index.
The Group uses the official published exchange rates above (1,507.5 as of 31 December 2022 and 15,000 as of 31 March 2023) to translate most balances and transactions in foreign currencies, regardless of their source or nature, in line with IAS 21 due to the lack of an alternative legal exchange mechanism. As per regulatory requirement, some balances are translated based on other exchange rate such as but not limited to the "Sayrafa" rate. Consequently, the financial statements do not reflect the change of disclosures required by IAS 29 which applies for hyperinflationary economies since the existence of a wide range of FX rates prevailing on the market and the absence of forthcoming revamping of the official peg make it difficult to proceed with such adjustments, especially when it comes to the valuation of monetary assets and liabilities. Furthermore, the use of different exchange rates renders the comparison of the financial position across period also difficult.
transferred to a subaccount and paid on a monthly basis of USD 400 in cash or equivalent and an amount in LBP equivalent to USD 400 and converted at a rate of USD/LBP 12,000 (before amendment at a rate of USD/LBP 15,000 on 20 January 2023) that will be paid 50% in cash and 50% credited to a payment card. The Central Bank recently announced that as at 31 December 2022, 170,000 depositors have so far benefited from the application of this circular for a total amount of USD 1.2 billion.
Until the above uncertainties are resolved, the Group is continuing its operations as performed since 17 October 2019 and in accordance with the laws and regulations. De facto capital controls and inability to transfer foreign currencies to correspondent banks outside Lebanon are exposing the Group to litigations that are dealt with on a case by case basis when they occur. Management is carefully considering the impact of these litigations and claims. Meanwhile, the Bank believes that a legislative solution is urgently needed, through the enactment of laws that are appropriate for the adjudication of the unconventional legal disputes arising under the current exceptional circumstances. Due to recent developments and the increasing trend in judgments ruled in favour of the plaintiffs and customers since 2021, Management considers that they may affect negatively the offshore liquidity of the Group, its foreign assets and its foreign currency exposure (refer to Note 54). The amount cannot be determined presently.
Within the aforementioned litigations of a systemic nature,
in particular, on 22 February 2022, a complaint was filed by a group of lawyers under the name " ماظنلا حلاصإ ديري بعشلا"
against "Lebanese banks" and the chairmen of their boards of directors for alleged committed crimes of tort and fraudulent bankruptcy, money laundering, fraud and breach of trust. Since then, as a result of this complaint, the Public Prosecutor of Appeal in Mount Lebanon initiated several procedures and issued several decisions in this respect on selected banks, that differ from bank to bank. These included clarification sessions, interrogations, requests of specific data, examination of data by appointed experts, restraining orders, imposing travel bans, preventing disposal of assets… With respect to Bank Audi sal, the Bank, members of its Board of Directors, as well as a number of current/former employees, were the target of restraining orders preventing them from disposing of their assets (Notes 26 and 28), in addition to accusations of violation of the Bank secrecy law. Bank Audi sal has so far sought diverse legal expertise on the matter: common consensus converges toward the fact that the claims of the Public Prosecutor of Appeal in Mount Lebanon are baseless and with no legal grounds. H.E. the Prime Minister Designate of Lebanon's sent a letter to the Ministry of Interior dated 22 February 2023, requesting H.E the Minister of Interior to instruct all Internal Security Forces - General Directorate not to execute any decision or order by the said Prosecutor in relation with the above accusations. H.E. the Minister of Interior sent such communiqué on the same date. Furthermore, on 28 February 2023, the Attorney General of Lebanon instructed the Prosecutor to stop the investigations and inquiries against the Bank, as well as other banks, until the state prosecution request, filed as a result of her actions, has been ruled upon and the decision rendered. On 4 May 2023, a decision was rendered by disciplinary judges in Lebanon to suspend and dismiss the Public Prosecutor of appeal in Mount Lebanon judge Ghada Aoun for her services, based on several complaints raised by several parties in claims handled by the latter, noting that the
for the total lack of legal grounds. In addition, the Group may, from time to time, become involved in other legal or arbitration proceedings which may affect its operations and results.
In the midst of the exceptionally difficult economic circumstances and the lack of economically vital decisions by the Lebanese authorities, Bank Audi reiterates its abidance with all regulatory and legal requirements. The Bank also strongly pleas the government of Lebanon to start taking all the necessary steps, starting with the urgent need of a Capital Control law and a comprehensive economic and financial reform plan, as requested by all international concerned bodies, including the IMF and the World Bank, to put a stop to this economic meltdown and to the destruction of its financial system.
Meanwhile, the Group is exerting extended efforts to (a) strengthen its capitalisation, (b) enhance the quality of its private loans portfolio, deleveraging it as appropriate and downsizing its balance sheet, (c) build up its offshore liquidity and reduce its commitments and contingencies to correspondent banks and financial institutions outside Lebanon, and (d) manage operating profitability.
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Interim Report March 2023
Management Discussion & Analysis
2.0. Operating Environment
The first few months of the year 2023 were characterised by a continuation of the presidential vacuum, the emergency care take nature of cabinet meetings, the lingering legislation process and the freezing of prior actions needed for an IMF final agreement. Such a politico-economic status quo translated into macro uncertainties and cloudiness, intense monetary pressures and exchange market drifts. Household consumption remained sluggish, though slightly improving, as evidenced by the rise in imports. The investment aggregate as a percentage of GDP is at a low unseen for long, as investors are refraining from taking investment decisions amid significant domestic politico-economic uncertainties.
A glance on the economic performance of the early months of this year suggests that real sector indicators were at the image of a mixed economy on the overall, though tending to extended sluggishness. Among indicators with negative growth over the first quarter, we mention cleared checks with a contraction of 22.4% and the merchandise at the port with a retreat of 2.7% year-on-year. Among indicators with positive growth, we mention the number of passengers at the airport with a rise of 24.0% and the number of aircraft landings and take-offs from BIA with an increase of 19.9%.
At the external level, the balance of payments recorded a surplus of USD 1,638 million over the first two months of 2023, after a deficit of USD 3,197 million over full-year 2022. The surplus in the balance of payments over the first two months is the result of a USD 2,140 million expansion of banks' net foreign assets, coupled with BdL's net foreign assets contraction by USD 502 million.
At the monetary level, the decline in BdL's FX reserves by USD 775 million over the first quarter is mainly the result of BdL's intervention on the "Sayrafa" platform within the context of BdL Circular 161 initiated at
At the banking level, the cumulative banking sector analysis since the onset of Lebanon's financial crisis, i.e. between October 2019 and February 2023, shows the following trends:
- A cumulative decline in total deposits by USD 70.7 billion amid |
noticeable withdrawals and loan redemption: customer deposits |
contracted from USD 168.4 billion at end-October 2019 to USD 97.6 |
billion at end-February 2023, the equivalent of 42%. Resident deposits |
contracted by USD 56.6 billion, while non-resident deposits dropped |
by USD 14.1 billion. FX deposits contracted by USD 29.0 billion over |
the period to reach USD 94.6 billion, while LBP deposits dropped by |
LBP 22.4 trillion to reach LBP 45.1 trillion as at end-February 2023. As |
a result, deposit dollarization went up from 73.4% in October 2019 to |
96.9% in February 2023. |
- A cumulative decline in total loans by USD 43.6 billion amid bank |
deleveraging efforts: Lebanese banks have been deleveraging |
significantly since the onset of the Crisis. Their loan portfolio dropped |
from USD 54.2 billion to USD 10.6 billion, the equivalent of 80.4%. |
The loan redemption represents 62% of the deposit contraction over |
the period. FX loans contracted by USD 28.6 billion, while LBP loans |
dropped by LBP 7.8 trillion over the period. As a result, loan dollarization |
went down from 70.4% in October 2019 to 89.7% in February 2023. |
- A cumulative decline in the LBP deposit interest rate by 832 basis points |
and in the USD deposit interest rate by 652 basis points: the average |
LBP deposit interest rate dropped from 9.03% at end-October 2019 to |
0.71% at end-February 2023, while the average USD deposit interest |
rate declined from 6.61% to 0.09% over the same period. The spread |
between the USD deposit rate and 3-month Libor reached close to |
-4.88% in February 2023, against +4.71% in October 2019. |
Lebanon's Major Economic Indicators
(USD Million) | 2021 | 2022 | 1Q 2022 | 1Q 2023 |
Macro economy | ||||
Real GDP growth (%) | -7.0% | -2.6% | -2.6% | -0.5% |
Monetary sector | ||||
Var M3 | 682 | 18,900 | -4,476 | -70,355 |
Velocity | 0.27 | 0.29 | 0.07 | 0.06 |
Cleared checks | 36,418 | 37,434 | 8,526 | 6,619 |
CPI inflation (end-period %) | 283.3% | 109.7% | 226.3% | 366.3% |
Public sector | ||||
Gross domestic debt | 100,377 | 101,814 | 100,649 | - |
Foreign debt | 38,515 | 41,337 | 39,359 | - |
Total gross debt | 61,861 | 60,477 | 61,291 | - |
External sector | ||||
Imports | 13,641 | 19,054 | 4,130 | - |
Exports | 3,887 | 3,493 | 1,121 | - |
Trade deficit | 9,754 | 15,561 | -3,009 | - |
Balance of payments** | -1,960 | -3,197 | -955 | 1,638 |
Banking sector** | ||||
Var: Total assets | -13,219 | -5,767 | -1,095 | -54,053 |
% change in assets | -7.0% | -3.3% | -0.6% | - |
Var: Total deposits | -9,671 | -3,751 | -855 | -28,064 |
% change in deposits | -7.0% | -2.9% | -0.7% | - |
Var: Total credits | -8,453 | -7,664 | -1,025 | -9,460 |
% change in credits | -23.4% | -27.7% | -3.7% | - |
(*) Full-year estimate and forecast by the World Bank.
(**) First two-month figures for Q1 2022 and Q1 2023.
Sources: World Bank, Central Bank of Lebanon, and concerned public and private entities.
3.0. Consolidated Financial Condition
2021 year-end. A negative net equity is now recognised by the Central Bank in its bimonthly balance sheet. While BdL's capital accounts stand at USD 700 million, BdL introduced (on the asset side) a valuation adjustment of USD 37 billion and other assets of USD 10 billion, leading to negative equity of -USD 47 billion, without accounting for potential losses on state lending and Eurobond portfolio holdings, thus leading to overall BdL losses of circa USD 65 billion.
The early months of the year were also marked with a significantly rampant inflation. This February, the year-on-year index has surged by 207.1% compared to results of February 2022 according to the Consultation and Research Institute. The exchange rate exceeded for the first time the six-digit threshold amid politico-economic uncertainty, speculative activities and a continuing disequilibrium between the domestic currency mass and the foreign currency mass in the parallel market.
At the capital markets level, equity markets continued the noticeable surge of the past two years. The BSE price index rose by 33.3% in the first quarter of the year, following a 37.2% increase in the index in 2022, driven by the rise in Solidere shares. This year's rise in prices occurred within the context of a 138.8% annual increase in trading volume year-on-year, moving from USD 51 million in the first quarter of 2022 to USD 122 million in the first quarter of 2023. Consequently, the turnover ratio (annual trading value to market capitalisation) increased from 2.0% to 2.5% between the two periods.
- A cumulative decline in banks FX liquidity abroad by USD 4.3 billion: |
Lebanese banks' claims on non-resident financial sector dropped from |
USD 8.4 billion at end-October 2019 to USD 4.1 billion at end-February |
2023. This comes as a result of the significant foreign liquidity usage |
by Lebanese banks to pay in cash for customers' withdrawals at the |
beginning of the Crisis period, and more recently under BdL Article 158. |
- A cumulative decline of USD 11.9 billion in banks' Eurobonds portfolio |
amid net domestic sales and provisioning: Lebanese banks' Eurobond |
portfolio reached USD 2.8 billion at end-February 2023, against |
USD 14.8 billion at end-October 2019. The portfolio contraction is tied |
to banks' net sales of Eurobonds at loss, mainly at the early months of |
the Crisis, in addition to high provisioning requirements imposed by |
monetary authorities on bond portfolios. |
- A cumulative decline in shareholders' equity by USD 15.7 billion amid |
banks' net losses: shareholders' equity contracted from USD 20.6 billion |
at end-October 2019 to USD 4.9 billion at end-February 2023 as a result |
of net bank losses over the period. The losses incurred by Lebanese |
banks come as a result of noticeable FX costs (rate differential between |
the BdL circular 151 rate and the official exchange rate), the effects of |
mark-ups, the rising operating expenses tied to the surging inflation, in |
addition to significant provisions to face private and sovereign risks at |
large. |
In the first quarter of 2023, the Bank's consolidated activity and results continue to be in line with those observed over the past 3 years, heavily marked by persisting challenges in the operating conditions in the country of presence, particularly in Lebanon. The continued absence of the reform packs unanimously requested by local and international parties to address the severe impact of the financial crisis prevailing in Lebanon since October 2019 is exacerbating the deep confidence crisis in the Lebanese banking system, while severely hampering Lebanese banks activity, which have been registering significant one-off cost tied to the Crisis. Traditional Banking activity through the customary intermediation of loans and deposits is almost inexistent: on the one hand, inflows of new deposits is hindered by the prevailing informal capital control measures undertaken by banks and remain restricted to a limited short term franchise of external accounts in fresh USD funding working capital need of customers. On the other hand, the prevailing uncertainties continue to negatively affect the corporate sector's investment sentiment and appetite to contract loans, to be added to a constricted capacity of banks to extend new loans.
On this backdrop, Bank Audi continued to focus its efforts in Lebanon, in the first quarter of 2023, on adapting quickly to the changing regulatory requirements while hedging its capital base, improving its quality of earnings, preserving the accumulated off-shore liquidity in foreign currencies, and facing heightened non-financial risks in the absence of a Capital Control law.
On the regulatory front, maybe the most salient event of the first quarter 2023 is the adoption of a new official exchange rate as of 1 February 2023 reaching LBP 15,000 per USD rising by 10-folds from an old rate of LBP 1507.5 per USD, marking the formal relinquishment by the Central Bank of Lebanon of a 30-year old currency peg. This formal devaluation of the LBP versus the USD resulted in a significant impact on all economic sectors' financial figures based on official rates. The effect of the aforementioned devaluation extended to the banking sector, affecting significantly the financial statements and regulatory ratios of all banks operating in Lebanon alike.
The following discussion and analysis includes figures translated in USD from LBP using the prevailing official exchange rates for the period (1,507.5 as of 31 December 2022 and 15,000 as of 31 March 2023). The aforementioned evolution of the official exchange rate coupled with the currency structure of balances adds an FX effect dimension to the evolution of aggregates in the first quarter of 2023. The FX effect dimension is exacerbated even more for balances and transactions in foreign currencies translated using rates other than official published rates as per regulatory requirements. In practice, Management estimates that this change will result in an inflationary impact on the Group's Financial Statements when expressed in LBP. At the income statement level, one-off FX gains will be recorded from the open FX position. In parallel, a positive impact will be recorded in Equity resulting from the net asset value of the Bank's subsidiaries that have a functional currency other than the Lebanese Pound. Expressed in USD, consolidated equity would witness a significant contraction.
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Bank Audi SAL published this content on 29 May 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 June 2023 12:34:48 UTC.