Bank Audi sal Audi Saradar Group : Bank Audi Activity Highlights at End-December 2011.

The Lebanese economy went through slowdown in 2011 but seems to have avoided a recessionary environment. According to IMF, real output is set to have recorded a growth of 1.5%, though slowing down considerably from the trend of the previous 4 years. For the first time in almost a decade, Lebanon's inflows were not able to totally offset its growing trade deficit, leaving a balance of payments deficit of US$ 2.7 billion over the first 11 months. Within this environment, bank deposits grew by a mere US$ 6.9 billion year-to-November (against US$ 9.2 billion over the similar period of last year), while bank loans to the economy managed to grow by a satisfactory US$ 4.7 billion. The slowdown in activity growth was actually coupled with downward pressures on spreads and interest margins within a historically low interest rate environment.

The MENA economy, which was shakened by widespread politico-security developments in a number of countries, displayed uneven performances in 2011. On the background of rising oil prices and domestic stimulus packages, GCC countries recorded an improvement in real GDP growth from 5.3% in 2010 to 6.9% in 2011, while near-eastern economies, directly impacted by the Arab turmoil, saw their growth contracting from 4.9% to below 1%. At the mirror image of this divergence in macroeconomic conditions, banking activity reported mixed performances, with GCC countries reporting an 11-month bank asset growth 6% higher than that of last year while near eastern bank assets posted a growth of merely a quarter of the growth reported during the corresponding period of 2010.

Within this context, Bank Audi sal - Audi Saradar Group achieved a good performance in 2011, with consolidated unaudited net earnings of US$ 365 million, rising by 3.7% relative to 2010, despite the allocation of the profits of the Syrian and Egyptian entities (US$ 42 million) to collective provisions on consolidated level, abiding by strict precautionary management policies. Within the context of such a conservative policy that translated into strengthening the Bank's resilience to adverse domestic and regional developments, the Bank continued to adopt a policy favoring operating conditions over growth to sustain its high financial flexibility and efficiency.

• Consolidated assets reached US$ 28.7 billion at end-December 2011 and US$ 40 billion when accounting for fiduciary deposits, security accounts and assets under management. Such an activity size maintains Bank Audi's position at the forefront of the Lebanese banking sector and among the top Arab banking groups.

• Consolidated deposits amounted to US$ 24.7 billion at end-December 2011. While the Bank's deposit base in Syria contracted by close to half its level of the previous year, the consolidated deposit base has been maintained at 2010 level, owing to relative growth at various subsididaries despite unfavourable domestic and external economic conditions.

• Shareholders' equity reached US$ 2.4 billion, representing 22% of the consolidated equity of the Lebanese banking sector and accounting for 8.2% of the Bank's assets, translating into a Basel II capital adequacy ratio of around 11%, versus an 8% minimum regulatory requirement.

• Despite the delicate operating conditions across a number of countries of presence of the Group, gross doubtful loans continued to represent only 2.9% of gross loans, with the coverage of those loans by specific loan loss provisions increasing from 72.6% at end-December 2010 to 77.3% at end-December 2011 and reaching 104% when accounting for real guarantees. Net doubtful loans to gross loans stood at 0.66% at end-December 2011, one of the lowest averages across the region.

• Bank Audi allocated net provisions of US$ 91 million throughout the year 2011, of which a significant share in collective provisions and provisions for general banking risks in major regional subsidiaries as a precautionary measure facing spillover effects of recent developments. As such, total collective provisions reached US$ 101 million at end-December 2011, i.e. the equivalent of 1.2% of the consolidated net loans portfolio.

• Primary liquidity placed with central banks and banks reached US$ 12.6 billion, representing 50.6% of customers' deposits, one of the most elevated liquidity levels in the region.

• The Bank's earning power strengthened this year, with total operating income crossing the US$ 1 billion mark for the first time ever. This is owed to a good performance in Lebanon mainly driven by the Bank's improved operating conditions as a result of accrued efforts deployed since 2010 to strengthen net interest margin and benefit from the notable growth in assets realized over the past few years. It is also owed to an increase in the operating income of subsidiaries abroad, with the latter adopting effective asset utilization policies despite difficult operating conditions.

• With total operating income increasing by an annual 14% in 2011 relative to the previous year (corresponding to an increase by US$ 124 million) and outpacing the 9.8% rise in total operating expenses (corresponding to an increase by US$ 41 million), overall efficiency strengthened further. As such, the cost to income ratio declined from 47.3% in 2010 to 45.5% in 2011.

• In parallel, the Bank's return on average assets maintained in 2011 its level of the previous year and which reached 1.27%, while the return on average common equity rose from 16% in 2010 to 16.4% in 2011 within the context of improved leverage.

• Based on such results, Bank Audi's earnings per common share reached US$ 1, while its common book per share stood at US$ 5.72. Subsequently and based on a common share price of US$ 5.96 at the closing of January 12th 2012, the Bank's common shares were trading at 1.04x the 2011 common book value and at 5.95x the 2011 common earnings.

In sum, the Bank's performances in the year 2011 reflect its strong resilience and flexibility in the face of unexpected and concurrent developments in countries of presence. In light of more favourable medium term outlook, the Group pursued its expansion strategy and was granted a deposit bank license to establish a banking entity in Turkey on October 27th 2011, the first such license to be given in this country in more than ten years. The importance of this development, with what it entails in terms of promising growth prospects, is tied to its expected impact on further consolidating the Group's regional positioning and strengthening its competitive standing.