In conversation with Freddie Baz of Bank Audi

Bank Audi is balancing consolidation and growth

In May 2016, rumors circulated that the largest banking group in Lebanon, Audi, had engaged in an exercise of tinkering with the possibility of relocating its corporate holding to a foreign jurisdiction. More tangibly, the bank released its results for the first quarter in 2016, showing lower assets and deposits when compared with the end of 2015 but a 10 percent year-on-year gain in profits. Executive sat down with Freddie Baz, the group’s chief strategist, to inquire about the group’s numbers, strategies and exercises in planning.

One reason why we felt the necessity to sit down with you at this time was to seek ultimate clarification of the rumors that Audi Group was considering a move of its holding.

I am not going to expand on this point. Everything needed as clarification was stated in our press release [see page 64]. It was very clear.

E   Looking at the results, there was a noticeable downturn in numbers at the end of the first quarter in 2016 when compared with the end of 2015. Can you explain?

A big chunk, albeit not all of [this drop] was due to currency movements, because we have a material presence in Turkey and Egypt. Sometimes there is some [foreign exchange] impact when we translate [all figures] into the national currency, which is the Lebanese pound, because the parent [company] is in Lebanon, but we express it in US dollar because of the currency peg.

E   But the Turkish lira did not drop much in the first quarter, or are we mistaken?

No, it was almost stagnant. What shows is that we have adopted a wait-and-see attitude in Turkey not only in Q1 but even in Q4 of 2015. We decelerated a bit. The prospects are still good. Turkey is an atypical case whereby the fundamentals are good, as seen by the improvement of the real sectors last year. They achieved 4 percent real growth, which is a very good performance as it represents more than two times the average GDP growth of emerging markets last year, excluding India and China. The very good performance does not only relate to growth. If you look at the debt profile, the fiscal balance to GDP is at a mere 1.5 or 2 percent – and the total debt to GDP [ratio] is within the Maastricht criteria (for EU economies). The concerns are only about the current account – which have also improved significantly, going down by almost 50 percent. So when you look at fundamentals, the country is doing well, but Turkey has a paradox. Its major weakness is [that they possess] zero oil and gas, so they have to import all their energy needs and [at the same time} it is an exports-driven economy. Thus they need to import the major inputs in exports, which is the most important driver of GDP growth. So there is some kind of dependence on the oil bill. This is a weakness which makes Turkey vulnerable from time to time, especially when the international environment is not supportive, such as the current one, which has been pervading for the last two years.

E   What pressures or non-supportive elements are you referring to?

The tapering and the Fed[eral Reserve’s] policy towards emerging markets which have led to many investments to exit emerging markets and return mainly to US markets. Turkey is very vulnerable. This, as I often say, is a weakness that is coming from a strength. Because it is an industrial country and Turkey’s exports are a major GDP growth driver, they need to import energy and are suffering from a structural current account deficit, which needs to be covered by short-term portfolio investments or longer-term foreign direct investments. If the international markets are not supportive, [Turkish economic players] can suffer some pressures on the real exchange rate, which happens from time to time – but they are wise enough to have implemented all kinds of hedge accounting.

The economic performance wasn’t achieved randomly. The GDP growth of 4 percent [in 2015] was supportedby more accommodating Fed policies.

E   Does the Turkish scenario contain other specific challenges?

There are many pluses and minuses which are translating into a real sector which is performing well within the context of a currency which is drifting, in my opinion, with no fundamental reasons. I have to mention also the second vulnerability besides the capital account in an efficient market which translates into capital inflows and outflows and ultimately the exchange rate. But Turkey is also a very politicized country that is undergoing major structural political changes under [President Recep Tayyip] Erdogan as he wants to change from a parliamentary system to a presidential one. This is generating some domestic political tensions which are impacting the psychological dimension of the exchange rate. It is true that the exchange rate was at 1.70 (Turkish lira per USD) when we did our investment but the fair value at that time was [better than] the market rate. After the change in the international environment and the slight deterioration in the domestic political environment, the market rate closed the gap to the fair value and went beyond that. Today most knowledgeable market analysts put the fair value of the Turkish lira at 2.4 while the [exchange rate] is at 2.9. This means there is a markup of close to 20 percent because of the political volatility and that is too much.

E   How much of the political volatility and markup of the exchange rate vis-à-vis the fair value is in your opinion domestic and how much is related to international issues?

In my opinion it is today almost 100 percent domestic. The economic performance wasn’t achieved randomly. The GDP growth of 4 percent [in 2015] was supported by more accommodating Fed policies and the oil prices were at a level which was supportive for Turkey to significantly reduce its current account deficit, and, more importantly, the improvement in the eurozone, which remains one of the most important trade partners for Turkey, has all together supported the economic performances. What remains is the domestic political scene where there were two very sensitive points at the beginning of the year that were creating [political] volatility. One of [the challenges] was mostly solved through the nomination of the [relatively independent, experienced and well-liked] central bank governor. Also the renewal of positions of all the members of the monetary policy committee was carried out with people [who were accepted by the markets] and provided comfort and confidence to the market. What remains now is the regime change [and the questions related to the ambition of Mr. Erdogan].

E   Aren’t there also international issues, such as the row with Germany over a satirist’s words?

That is all part of the game. But in my opinion, 20 percent markup is excessive. One has to go to Istanbul and see the situation on the ground. People love to talk politics but at the end of the day there is a socioeconomic issue which is so large and so dense that there is some power of inertia in Turkey. I am telling you this because in the full year 2015, the [banking] sector achieved growth rates of major aggregates in two-digit territory, on US dollar adjusted basis.

E   So how did Odeabank perform in this context?

We have outperformed the industry by adding four to five bips market share in assets, loans and deposits. That means that our growth rate was higher than the average. These are five basis points, but it is a $700 million market. But in Q4 [of 2015] we said [to go slower] and we kept [that approach] in Q1 [2016].

You shouldn’t relate deposits to profits. You should relate deposits to spreads, which is the top line, not the bottom line.

E   But as you said, the currency fluctuations cannot explain all the drops in your aggregates of Audi Group.

This brings us back to the first argument that we have been in consolidation mode in Turkey versus our traditional growth mode. In Egypt, we did grow but this was impacted by the heavy depreciation of the currency, and Lebanon did not achieve any significant performance. The end result was those slightly decreasing figures but it is not meaningful [to review performances] on a quarter to quarter basis. We have a budget to add $3 to 4 billion in the full year 2016 and we are confident that we will achieve it. Having said that, however, we have been able to increase our profits by ten percent.

E   Is it then naïve to think that growth in profits is correlated to growth in deposits?

You shouldn’t relate deposits to profits. You should relate deposits to spreads, which is the top line, not the bottom line. If you want to buy market share, it is at the detriment of your spread. It will ultimately impact your bottom line but it starts by looking at the top line. Our spreads have been improving and we haven’t been competing to get deposits. This explains to a certain extent this consolidation mode versus the growth mode, but is as strategic as growing your deposits base. We are very happy about our overall performance; it is true that we haven’t shown in Q1 important increases on the major aggregates on the group level, but when you look at the key performance metrics of the group, they all improved in terms of spreads, non-interest income generation and decreasing cost to income; and also you need to know that the 10 percent increase in consolidated profits do translate into similar trends in the positions of individual entities. The breakdown of consolidated profits over major development pillars – Lebanon, Turkey, Egypt, and private banking and other entities – shows a balanced contribution to the increase from all those pillars.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.