In a recently released report, FFA Private Bank initiated coverage on Bank Audi with a hold recommendation and a fair value estimate of $73.9 per share, implying a price-to-book ratio (P/B) 2009 of 1.39 and a price-to-earnings ratio (P/E) 2009 of 9.83.
The report pinpoints that Bank Audi has pursued an ambitious expansion strategy based on significant organic growth coupled with a series of mergers and acquisitions in light of the wave of consolidation witnessed by the Lebanese banking sector from the mid-1990s onwards. Thus, Bank Audi has rapidly grown to become the largest bank in terms of deposits, assets, loans and shareholders’ equity in Lebanon, where it operates the widest branch-network throughout the country.
Expansion
On the international front, Bank Audi, in the late 1970s, expanded its activities to Europe by establishing entities in Switzerland and France. In more recent years, Bank Audi has started building a strong regional franchise, as witnessed by 71 operating branches, 185,000 accounts and $3.3 billion in assets accumulated in only the last three years of activity. Currently the bank’s regional presence covers Jordan, Syria and Egypt where it provides comprehensive retail and commercial banking products, Qatar and Saudi Arabia where the bank is specialized in capital market activities and corporate and private banking, respectively, as well as Sudan and the United Arab Emirates. While Islamic banking is the core business of the bank in Sudan, Bank Audi operates in the UAE out of a representative office.
In the late 1990s, Bank Audi consolidated its universal banking profile, covering a large spectrum of banking services ranging from retail, commercial, investment and private banking to capital market activities, insurance and Islamic banking.
Looking ahead, Bank Audi’s strategic orientations on the domestic front revolve around strengthening its domestic franchise by consolidating its commercial banking franchise and corporate business relationships, further strengthening the retail banking coverage and franchise as well as developing private banking towards asset management. On the international level, Bank Audi aims to build a strong franchise in the Middle East and North Africa region, consolidating its presence in Europe and strengthening its existing coverage of the Lebanese diaspora in West Africa, Australia and Latin America.
Regarding the bank’s financial results, the report notes that Bank Audi demonstrated a strong performance in 2008, as well as during the first half of 2009, in spite of a severe downturn in global markets. Proving its resilience to the global financial turmoil, Bank Audi managed to increase its assets, customer base and earnings by 17.9 percent, 21 percent and 19 percent, respectively, in 2008 while maintaining adequate capitalization and liquidity levels. Results from the first half of 2009 reveal a growth of 3.4 percent in the loan portfolio and a substantial 11.6 percent increase in the customer base, sustaining the bank’s leading position in terms of loans and deposits. Net profit of $132.9 million was declared for the first half of 2009, indicating a 1.9 percent year-on-year increase in the bottom line results.
Spanning five years, forecasts predict Bank Audi will witness strong growth in its balance sheet and will continue generating strong results, while capitalization levels remain sound. With an important part of total growth originating from the bank’s international expansion strategy, Bank Audi’s deposit expansion will remain sustained as mirrored by a compounded annual growth rate (CAGR) of 12.7 percent over the projection period, and will be the main driver behind the group’s balance sheet growth. As for the group’s lending activity, it is noted that loans and advances will increase by a CAGR standing at 12.38 percent for the whole projection period. This sustained growth pace is expected to be triggered by a significant rise in the contribution of newly established regional entities to consolidated activity, as well as by steadier economic environment on the domestic scene which would, in turn, lead to a surge in demand from the private sector.
Loans-to-deposits ratio
Also, the report highlights that potential pressure on the economic environment could lead to a slight deterioration of asset quality in the context of a significant growth of the loan portfolio. However, this risk should be mitigated by the bank’s strict risk management.
Despite a substantial improvement in the bank’s cost-efficiency in 2008 and the first half of 2009, the report noted that Bank Audi’s cost-to-income ratio is still considered high, owing to the bank’s aggressive expansionary policy in addition to a heavy cost structure. The analysis concludes that Bank Audi will witness a faster pace in revenue growth compared to cost growth, which would lead to a gradual decrease in the cost-to-income ratio from 54.96 percent in 2009 to 45.72 percent by the end of the projection period.
Cost-to-income ratio
Triggered by solid growth in the bank’s balance sheet and a tighter cost control policy, and supported by a potential improvement in the overall market conditions and higher interest spreads, as downward pressures on the London interbank offered rate (Libor) ease, the net income figure is expected to move from $238 million in 2008, to $497 million in 2013, underlying a CAGR of 15.9 percent.
This surge in earnings will have a direct impact on profitability ratios. Thus, the return on average equity is expected to move from 12.9 percent in 2008, to 16.8 percent in 2013, while the return on average assets, which stood at 1.24 percent in 2008, should move towards 1.38 percent by 2013.
Net income and growth rates
Marwan Salem is the head of research & advisory and RAYA FREYHA is a financial analyst at FFA Private Bank
