In a recently released report FFA Private Bank has initiated coverage on BLOM Bank, with a buy recommendation and a fair value estimate of $91.6 per share, implying a price to book ratio (P/B) 2009 of 1.41 and a price to earning ratio (P/E) 2009 of 7.40.
The report pinpoints that BLOM Bank has pursued an organic growth strategy, abstaining from the wave of consolidations witnessed by the Lebanese banking sector from the mid-1990s onwards. Thus BLOM has grown organically and gradually to become a major player in the Lebanese banking sector, where it operated a network of 56 branches nationally in 2008. Domestically, the bank is the largest commercial bank in terms of net profits; as for all other major ranking criteria, it is worth noting that BLOM occupies the second position in terms of loans, deposits, assets and shareholders’ equity.
Furthermore, the report stressed the bank’s business diversification. In this regard, it is noted that BLOM has launched new segments and products as the scope of the bank has been expanded from traditional commercial and retail banking to private and investment banking, asset management, brokerage as well as insurance and Islamic banking.
Beyond its historical presence in Europe, covering France, England, Romania, Switzerland and Cyprus, BLOM’s regional expansion has been a major part of the institution’s strategy. The bank provides exposure to several Middle Eastern countries, namely Egypt, Jordan and Syria, offering potential for serious growth. Additionally, BLOM has expanded its presence in the Gulf from two branches in the UAE, to recently receiving licenses to operate in Qatar for commercial and private banking activities and in Saudi Arabia for investment banking.
As for the group’s strategy, it is noted that BLOM is currently building its corporate strategy around two pillars, which revolve around maintaining a leading position domestically and further strengthening its presence overseas to reach a balanced breakdown of earnings between Lebanon and its affiliates abroad. While the first strategic objective is to be attained by pursuing organic growth, preserving a high level of cost efficiency and consolidating its universal bank profile, the second one revolves around further expanding its branch network and scope of service in its existing countries of operation and continuing to look for expansion opportunities in countries with satisfactory risk profiles.
BLOM has demonstrated a robust performance in the last few years, more specifically in 2008 and during the first half of 2009, proving its resilience to the global financial downturn. Last year, the bank managed to expand its deposit base and loan portfolio by 9.85 percent and 25.3 percent, respectively, and its net profit by 22.9 percent, moving the bank’s earnings to $252 million in 2008 and consolidating its leading position in profitability among its domestic peers. Loans and advances grew by 3.6 percent during the first half of 2009, while total deposits expanded by 10.5 percent over the same period. Net profit of $138.3 million was declared for the first half of the year indicating a 5.8 percent year-on-year increase in the bottom line results.
The analysis and forecasts discuss that, on the whole, BLOM is set to significantly grow in size and in profitability. The analysis performed is based on the fact that BLOM will maintain a sustained level of growth in its balance sheet, as witnessed by a compound annual growth rate (CAGR) standing at a respective 12 percent and 13.29 percent for customer deposits and loans. Over the projection period, the growth will be underpinned by the regional expansion and a probable revival of the economic environment which, in turn, would lead to a surge in demand from the private sector. However, it is noted that deposit growth might be adversely affected by an anticipated upturn in international rates as pressures on the London interbank offered rate (Libor) eases.
As for the bank’s liquidity levels, they will remain ample as mirrored by the loans-deposits-ratio standing at 23.1 percent for 2008, and slightly increasing to 24.5 percent by the end of the projection period, spanning five years.
BLOM Bank’s loans-to-deposits ratio
BLOM boasts a high level of cost-efficiency, with a cost-to-income ratio standing at 42.9 percent in 2009, which is one of the lowest in the industry. Looking ahead, the ratio is expected to slightly increase in 2009 as a result of an aggressive regional strategy revolving around the development of the Saudi and Qatari entities, as well as the deployment of additional branches in existing countries of operations. From 2010 onwards, the ratio is expected to gradually decrease to reach 40.85 percent by the end of the projection period due to the fact that growth in revenues will surpass growth in costs.
BLOM Bank’s cost-to-income ratio
Triggered by a solid growth in its balance sheet and supported by a strict cost containment strategy, as well as an increasing contribution of regional entities to the group’s earnings, the analysis indicates that the bank’s bottom line growth is expected to remain strong, as reflected by a CAGR of 13.5 percent over the forecast period. In addition, the analysis pinpoints that higher interest spreads resulting from easing pressures on Libor will likely contribute to a surge in earnings.
BLOM Bank’s net income and growth rates
BLOM Bank boasted return on average assets (ROAA) and return on economic equity (ROEE) of 1.40 percent and 17.9 percent, respectively, in 2008. These return ratios should move towards 1.51 percent and 18.5 percent, respectively, by 2013.
Finally, it is worth mentioning that the forecasts assume that the bank is expected to maintain an adequate level of capitalization, while, as a result of a rapid surge in the loan portfolio, BLOM Bank will likely face a slight deterioration of its asset quality indicators.
Marwan Salem is head of research & advisory and Raya Freyha is a financial analyst at FFA Private Bank
