Byblos Bank - FFA Private Bank BYBLOS B… · Byblos Bank’s net income stood at USD 122 mn in 2008, recording a 23% increase y-o-y. We expect the Bank’s bottom line to increase

A key domestic player with regional footprints

A strong domestic presence focused on traditional banking

Based on organic growth and strategic acquisitions, Byblos Bankemerged as a major player in the Lebanese banking sector. Today itoperates a network of 76 branches in Lebanon and ranks thirdamong its peers. It has maintained a traditional banking profile,retaining a focus on retail, commercial and trade finance activities.

A regional expansion revolving around trade finance

Beyond its historical presence in Europe, Byblos Bank hasstepped up its expansion effort into the Middle East since 2003,targeting high-growth markets with underdeveloped bankingactivity markets where it can benefit from significant tradefinance activity and considerable trade flows with Lebanon.

We expect Byblos Bank to witness sustained but slowergrowth and liquidity levels to remain high

After having registered a significant growth in all its majorindicators in 2008, namely a growth rate of 18.5%, 15.3%, and24.8% in assets, deposits and loans respectively, we have taken aconservative approach based on slower growth rates over theprojection period. However, we expect Byblos Bank’s bottom lineto grow significantly while sustaining high liquidity and soundlevel of capitalization.

We value Byblos at USD 2.47 per share

Our fair value estimate, derived from the DECF projections equalsto USD 2.47 per share, implying a P/B 09 of 1.38 and a P/E 09 of 8.0.We, accordingly, assign a buy recommendation to Byblos Bank.

Key performance indicators:

4

Byblos BankEquity Research July 23rd 2009

Sector: BankingCountry: Lebanon

Current price*: USD 1.82

Target price: USD 2.47

Recommendation: BUY

DisclaimerThis document has been issued by FFA Private Bank for informational purposes only.This document is not an offer or a solicitation to buy or sell the securities mentioned.This document was prepared by FFA Private Bank from sources it believes to bereliable. FFA Private Bank makes no guarantee or warranty to the accuracy andthoroughness of the information mentioned, and accepts no responsibility or liabilityfor damages incurred as a result of opinions formed and decisions made based oninformation presented in this document. All opinions expressed herein are subject tochange without prior notice.

Contacts

Head of Research and Advisory: Marwan Salem [email protected]+961 1 985195

Sales and Trading, FFA Private Bank (Beirut)+961 1 985225

Sales and Trading, FFA Dubai ltd (DIFC)+ 971 4 3230300

- Net Interest Income (USD mn)- Non-Interest Income (USD mn)- Net Profit (USD mn)- ROaA- ROaE- BVPS (USD)- EPS (USD)- P/E- P/BV

430164251

1.35%16.1%2.690.563.260.68

2013e

381152220

1.28%15.2%2.400.493.730.76

2012e

335139189

1.20%14.1%2.150.424.320.85

2011e

288127160

1.12%13.2%1.950.365.120.93

2010e

254116138

1.10%12.7%1.790.315.901.02

2009e

23698122

1.10%13.4%1.650.276.741.10

2008

Listing: Beirut Stock ExchangeListing GDRs: London Stock Exchange Reuters code: BYB.BY, BYBPT.BY, BYBQ.LBloomberg code: BYB.LB, BYBPT.LB, BYB.LI Market cap: USD 770.1 mnNumber of common shares: 217.1 mnNumber of priority shares: 206.0 mn

Share data

YTD r +13.8%1M r +2.2%3M r +11.0%12M r -31.6%52 – Wk range USD1.58-2.74

Share price information*

Byblos common shares performance

* Byblos Bank common shares closing as of the 23rd of July 2009

This report should be read in conjunction withthe Lebanese banking sector review 2008.

USD

Jul 0

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08

Nov

08

Jan

09

Mar

09

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Jul 0

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EQUITY RESEARCH BANKING - BYBLOS BANK 1

Investment Summary 2

Company Overview 4- Brief background 4- Capital increase and shares listing 5- Ownership structure 6- Corporate structure 6- Business lines 7- Geographical coverage 10- Strategy 14- SWOT analysis 16- Latest developments 17

Financial Highlights and Forecasts 18- Source of funds 18- Uses of funds and asset allocation 19- NPLs and provisions 21- Net interest income 21- Non-interest income 23- Returns 24- Efficiency 24

Valuation 26- Valuation methodology 26- Discount rate calculation 26- Fair value estimate and recommendation 27

Financial Statements 28- Balance sheet 28- Income statement 28- KPIs and key ratios 29

Contents

Based on more than 50 years of growth and strategic acquisitions, ByblosBank emerged as a major player in the Lebanese banking sector. Today itoperates a network of 76 branches in Lebanon and has operations in 10countries across Europe and the MENA region. In contrast with its mostprominent competitors (Bank Audi and Blom Bank), Byblos Bank hasmaintained a more traditional banking profile, retaining a focus on retail,commercial and trade finance activities. However the Bank is also active inother lines of business including insurance, brokerage and researchservices.

Byblos Bank embarked on a geographical expansion in the mid-1970s tomitigate the surge in domestic risk following the start of the civil war. As aresult, the Bank has been present in Europe since 1976 after establishing asister bank in Brussels (1976) and branches in Paris (1980), London (1981)and Limassol/Cyprus (1984). In recent years, the Bank has undertaken anumber of steps to expand its business and improve its market share andprofile by setting up subsidiaries in key MENA countries. In 2008, 22.4% ofthe Bank’s total assets and 20.1% of its net income were derived fromoutside Lebanon (including international activities booked in Lebanon)compared to 12.1% and 2.1% respectively in 2004.

The Bank’s corporate strategy is focused on creating value for itsshareholders through continued domestic and regional growth,geographic and product diversification, operational efficiency, costcontainment and optimizing its capital structure.

In line with the overall performance of the Lebanese banking sector in2008, Byblos Bank reported a significant growth in all its major indicators.It registered 18.4% growth in assets, 15.1% growth in customer depositsand 25.4% in loans which stood at USD 11.2 bn, USD 8.3 bn and USD 2.8 bnrespectively at end December 2008. In terms of net income, it reported a23 % increase in 2008, totaling USD 122 mn for the year. In 2008, ByblosBank ranked third among Lebanese banks in terms of total assets,customer deposits, shareholders’ equity and net profit.

Net Profit of USD 24.96 mn was declared for Q1 09, indicating an 18.6%increase y-o-y. Loans remained flat q-o-q as a result of a cautious attitudeamidst the uncertain political environment that prevailed before theparliamentary elections. On the other hand, customer deposits (includingrelated parties deposits) displayed a positive 4.6% q-o-q growth reachingUSD 8,748 mn.

We expect customer deposits to grow at a CAGR of 10.6% over the 2009-2013 period, to reach USD 13,703 mn at the end of the projection periodwith the bulk of the aggregate growth to be derived from the regionalexpansion strategy into under-banked countries with substantial tradefinance activity. We have forecasted a 15% customer deposits growth for2009, decelerating gradually to 8% in 2012e.

Byblos Bank has a strong capital position, holding a Basel II capitaladequacy ratio of 12.13% as of Q3 08, significantly above regulatory levelsof 8% currently required by the Central Bank of Lebanon.

As a result of a surge in lending activity, Byblos Bank is anticipated towitness an asset allocation shift in line with the general trend in theindustry, which would lead to a shift of the balance sheet structure, tohigher interest earning assets and result in a better asset deployment. Also,we expect this trend to spread even further in the event the government

Investment Summary


undertakes privatization reforms. The loan to total assets ratio reached24.8% in FY 08, slightly above the sector average of 22.3%. We forecast thisratio to increase gradually to 29.3% by the end of 2013e to the detriment offinancial assets which are expected to decline from 43.8% to 39% over theprojection period, underlying a diminishing exposure to governmentsecurities.

Although loans witnessed a 25.4% growth y-o-y reaching USD 2,783 mn in2008, in Q1 09 they remained flat. We expect loans to grow at a slower paceat a CAGR of 13.9% over the 2009-2013 period, and to record a 12.8%growth in 2009e.

Byblos Bank’s loans-to-deposits ratio stood at 34% in FY 08 and is estimatedto witness a slight increase, reaching 39% by 2013e. Despite this implicationof lower liquidity levels, the ratio is still low when compared to internationalstandards.

We expect the NPL ratio to stand at 3.6% in 2009e and to reach 4.7% by2013e in parallel of the forecasted increase in loan exposure, with loansstanding at USD 3,137 mn and USD 5,331 mn respectively. At the sametime, and as a consequence of the increase in the NPL ratio, we anticipateprovisioning costs to increase moderately to USD 7 mn in 2010e and USD 9mn in 2011e. Going forward, we expect Byblos Bank to maintain a strictprovisioning policy as witnessed by the LLP to NPL ratio, which is forecastedto be in the range of 83%-84% over the projection period.

Byblos Bank’s net income stood at USD 122 mn in 2008, recording a 23%increase y-o-y. We expect the Bank’s bottom line to increase at a CAGR of15.5% over the forecast period and reach USD 251 mn in 2013e, on the backof a loan-book expansion coupled with a higher contribution of regionalentities to the Group’s net income. Moreover, net income growth isexpected to be bolstered by higher net interest spread resulting fromeasing pressures on Libor coupled with a significant deposit growth.

The growth in net income will directly impact the return ratios ashighlighted by the ROAE steadily increasing from 13.4% in 2008 to 16.1% in2013e. As for the ROAA, it will pursue the same rising trend moving from1.10% in 2008 to 1.35% in 2013e.

Byblos Bank is expected to maintain an adequate level of cost efficiencydespite its domestic and regional expansion strategy. The bank intends tocompensate the costs resulting from the setting up of new branches inLebanon and the penetration of new markets, by deploying an efficientcost-control approach. We anticipate the cost-to-income ratio to graduallydecrease from 47.38% in 2008 to 44.58% by the end of the projectionperiod, on the back of a considerable surge in revenues in parallel with astrict cost containment strategy.

Our approach to providing a fair value estimate for Byblos Bank is based ona discounted Equity Cash Flow (DECF) methodology. Based on ourprojections, our fair value estimate derived from discounted dividendsattributable to common and priority shareholders and excess capitalamounts to USD 2.47 per share, implying a P/B 09 of 1.38 and a P/E 09 of 8.0.

We, accordingly, assign a Buy Recommendation to Byblos Bank.


Brief background

Byblos Bank's origins date back to 1950 when a commercial and financecompany was founded under the name “Societe Commerciale AgricoleByblos Bassil Freres & Co.”. In 1963 it converted its name to Byblos Bank SAL.

In its first phase of growth, the Bank expanded gradually on the domesticmarket where, by end of 1977, it operated a network of 13 branches. Duringthe 1975-1990 civil war, the Bank expanded internationally by establishinga sister bank in Brussels (1976) and branches in Paris (1980), London (1981)and Limassol/Cyprus (1984). In the early 1990s and following the end of thecivil war, the Bank pursued a local expansion strategy with a focus on retailbanking.

In the late 1990s, the Bank’s domestic presence was further strengthenedby a string of acquisitions, namely 19 branches of Banque Beyrouth pour leCommerce in 1997, the loan portfolio of Nova Scotia Bank in Lebanon in1999, 100 percent of the outstanding share capital of Wedge Bank MiddleEast, the loan book and fixed assets of ING Barings (Lebanon branch) in2001, and the assets and liabilities of ABN AMRO Bank N.V. (Lebanonbranch) in 2002.

In recent years, the Bank has undertaken a number of steps to expand itsbusiness and improve its market share and profile by setting up subsidiariesin key regional countries. This includes the launching of a representativeoffice in Abu Dhabi, UAE, in 2005 and the setting up of a branch in Erbil, Iraqin 2007 as well as the establishment of three subsidiaries, Byblos Bank Africa(2003), Byblos Bank Syria (2005) and Byblos Bank Armenia (2007). In 2008,the Bank obtained a license for the establishment of a representative officein Lagos, Nigeria.

Based on more than 50 years of growth and strategic acquisitions, ByblosBank emerged as a major player in the Lebanese banking sector. Today itoperates a network of 76 branches in Lebanon and has operations in 10countries across Europe and the MENA region. In contrast with its mostprominent competitors (Bank Audi and Blom Bank), Byblos Bank hasmaintained a more traditional banking profile, retaining a focus on retail,commercial and trade finance activities. However the Bank is also active inother lines of business including insurance, brokerage and researchservices.

In line with the overall performance of the Lebanese banking sector in 2008,Byblos Bank reported a significant growth in all its major indicators. Itregistered 18.4% growth in assets, 15.1% growth in customer deposits and25.4% in loans which stood at USD 11.2 bn, USD 8.3 bn and USD 2.8 bnrespectively at end December 2008. In terms of net income, it reported a 23% increase in 2008, totaling USD 122 mn for the year.

In 2008, Byblos Bank ranked third among Lebanese banks in terms of totalassets, customer deposits, shareholders’ equity and net profit. This reflectsthe aggressive growth adopted by the Group over the years, which hasfueled the Bank's rise in the rankings from ninth to third place among itspeers.

Company Overview

Byblos Bank was establishedin 1963 in Lebanon “

Byblos Bank operates anetwork of 76 branches inLebanon and has operationsin 10 countries across Europeand the MENA region

“

4


Capital increase and shares listing

The aggressive growth adopted by the Bank, namely the domesticexpansion of its retail and commercial banking over the 1995-2002 period,and the expansion across the MENA region throughout the current decade,has been funded by several capital/debt issues over the years:

Table 1: Byblos Bank’s capital/debt issues

Byblos Bank has recently redeemed all of the Series 2003 preferred sharesand is in the process of replacing them by a new issue of preferred shareswith a value of up to USD 200 mn.

With regard to the share listing, it is worth noting that the Bank listed 30%of its outstanding shares on the BSE in 1998, while the remaining shareswere listed on the BSE in 2006.

4

Source: Byblos Bank

The aggressive developmentgrowth adopted by the Bank,has been funded by severalcapital/debt issues

“ 4

In 1995, Byblos Bank was the first Lebanese Bank to tap internationalmarkets through an IPO

In 2002, the Bank issued USD 100 mn of subordinated bonds

In 2003, the Bank issued USD 100 mn Tier 1 non cumulative redeemablepreferred shares

In 2005, Byblos Bank doubled its paid-up capital to USD 330 mn, thus thetotal equity exceeded USD 700 mn

In 2007, Byblos Bank issued USD 220 mn subordinated debt convertibleinto common shares with a coupon of 6.5%, an exercise price of USD 2.25per share and a 5 year tenor

In 2008, the Bank issued USD 200 mn of preferred shares

Byblos Bank’s capital/debt issues


Ownership structure

The Bassil family is the major shareholder of Byblos Bank SAL. The familydirectly and indirectly controls 49.1% of the Group. The below chart depicts the ownership structure of Byblos Bank SAL.

Corporate structure

The Bassil family is the majorshareholder of Byblos BankSAL“

4

41.7% 38.0%

4.3%

3.6%

2.9

%

2.6% 1.

7% 1.6% 1.

4% 1.2% 1.0

%

Byblos InvestHolding S.A Luxembourg

41.7%

4.3%

3.6%

2.9%

2.6%

1.7%

1.6%

1.4%

1.2%

1.0%

38.0%

Anasco Holding (**)

Francois Bassil (**)

Vectra S.A.L Holding

Rami Reffat El Nimer

Frabas Corporation (**)

Blom Invest Bank S.A.L

Blakeney L.P

Ali Hassan Dayekh

Blakeney Investors SICAV

Over 4,200 individualshareholders (***)

Figure 1: Byblos ownership structure (*)

Source: Byblos Bank(*) As at 25 February 2009, excluding preferred shares.(**) Major shareholders in Byblos Invest Holding(***) Holding less than 1% each

Source: Byblos Bank

4 Figure 2: Byblos corporate structure

4

4

76 branches in Lebanon

1 branch in Cyprus

1 branch in Iraq

Representative office inUAE, Abu Dhabi andNigeria, Lagos

Byblos Bank S.A.L.(Lebanon)

Byblos Bank Europe S.A (Belgium)Headquartered in Brussels

One branch in ParisOne branch in London

Byblos Bank Africa (Sudan)One branch in KhartoumOne branch in Bahri

Byblos Bank Syria S.A.Seven branches

(With management control)

Byblos Bank Armenia CJSC Three branches

Byblos Invest Bank S.A.L.(Lebanon - Investment Banking activities)

ADIR(Adonis Insurance & Reinsurance Co. S.A.L) Lebanon

Adonis Insurance and Reinsurance(Syria)

Adonis Brokerage House S.A.L

Byblos Management S.A.L(Holding – Investment activities)

100%

56.9%

41.5%

65%

100%

64%

76%

99.4%

100%


Business lines

Traditionally, Byblos Bank has been developing a strong presence in theretail and commercial banking segments and has a proven ability in thesetwo activities. On the other hand, the Bank has diversified its revenuestream by expanding new business lines, namely investment banking,capital markets and insurance.

Retail/Consumer banking

The Bank has developed a diversified retail banking product mix. Its retailproducts include checking and term deposits; credit, charge and debit cards;personal, housing, car, kafalat and professional loans; financial planning;foreign exchange services; insurance and bancassurance products as well asan ATM service through a network of 95 ATMs across Lebanon.

The retail banking segment, which manages more than 400,000 customeraccounts, is backed by a wide distribution network covering the entirecountry. The Bank’s domestic network consists of 76 branches and is thesecond largest in Lebanon. The Bank’s presence is more concentrated in ruralareas than other Lebanese banks. Outside Lebanon, the retail bankingnetwork consists of 17 branches including one in Limassol, Cyprus; one in Erbil,Iraq; as well as one branch in each of Brussels, London and Paris; two branchesin Sudan; seven branches in Syria and three in Armenia.

Commercial banking

Byblos Bank provides commercial banking services to SMEs and largecorporations and is considered a leading player in the local corporatebanking sector. As of 30 September 2008, the Bank had 833 corporateclients, 844 SME clients and 142 international corporate clients.

Going forward, the Bank is focusing on developing its SME portfolio and islooking to capitalize on its leading position in commercial banking by cross-selling its retail, capital markets and treasury products to the commercialclients’ employees.

Traditionally, Byblos Bankhas been developing a strongpresence in the retail andcommercial banking sectorand has a proven ability inthis segment

“

Byblos Bank beneficiatesfrom a strong retail franchisebacked by 76 branches inLebanon and 17 branchesabroad

“

4

4

Net Interest Income71%

71% 21%

21%

2%

6%

6%

Net Fees & CommissionsIncomeNet Trading Income

Other Operating Income

Figure 3: Breakdown of operating income 2008

2%

Source: Byblos Bank


The pie chart below depicts the breakdown of loans and advances tocustomers by economic sector:

International banking

The Bank’s international division manages and supervises the Bank’scorrespondent banking activities, as well as the activities of the Bank’soverseas entities. The overseas entities department within the internationalbanking division provides support to Byblos Bank Europe, Byblos BankAfrica, Byblos Bank Syria, Byblos Bank Armenia, the Bank’s branches inCyprus and Iraq and the Bank’s representative office in the United ArabEmirates.

Investment banking

In order to further develop the Bank’s investment banking activities, inOctober 2003 Byblos Bank established a new subsidiary, Byblos Invest Bank,headquartered in Beirut. The creation of this investment banking affiliatehas allowed the Bank to offer its clients advisory services, while maintainingits core image as a retail bank.

The investment banking arm of Byblos Bank started its operations bylaunching a private equity investment company under the name ByblosVenture S.A.L. The latter is a USD 20 mn private equity fund targetingminority stakes in well-established companies in Lebanon and the Levant.It was established in 2007 with international partners, namely the EuropeanInvestment Bank and the OPEC Fund for International Development. Thisachievement is the first step of Byblos Bank in the asset management fieldat large and more specifically in the private equity business and could leadto a wider asset management business.

In 2008, the investment banking arm of the Bank managed to register aconsiderable growth in its assets, rising from USD 242 mn in 2007 to USD635 mn by year-end 2008, with USD 3.6 mn in reported profits.

The Bank’s action plan revolves around further expanding its investmentbanking activities towards mergers & acquisitions advisory as well as initialpublic offering (IPO) advisory or secondary offerings. Certain sectors will bemore heavily targeted in this regard, and these include real estateinvestments, telecommunications and large infrastructure projects.Moreover, Byblos Invest Bank plans to participate in the privatizationprogram expected to be conducted by the Lebanese government.

4

14%

12%

23%

3%

Retail

Other

Trade (wholesale and retail)26%

20%

2%

14%

12%

23%

3%

26%

20%

2%

Agriculture

Manufacturing

Construction

Services

Figure 4- Breakdown of loans by economic sector 2008

Source: Byblos Bank

Around the quarter of loansoutstanding are allocated toretail customers“

The international bankingdivision provides support tothe overseas operations ofthe Group

“

In 2007, Byblos launcheda USD 20 mn privateequity fund targetingcompanies in Lebanonand the Levant

“

By end 2008, the investmentbanking arm of the Bankmanaged USD 635 mn intotal assets and the actionplan revolves aroundexpanding towards M&A andIPO advisory

“


Financial markets

The Financial markets department serves as a platform for the Bank’streasury, capital markets and private banking services. While the treasury department manages the Bank’s available liquidity, theprivate banking department offers investment opportunities to corporateand high-net worth customers and the capital markets departmentmanages the Bank’s equity and fixed income portfolio. The Bank started its private banking services in 2003 to attract high net-worth clients by offering them personalized banking services, financialsolutions and investment alternatives. As of September 2008, the Bank had297 high net worth individuals as private banking clients. In addition, theBank recorded a 3.8% market share out of the total transactions value onthe Beirut Stock Exchange in 2008.

Insurance

ADIR Insurance and Reinsurance is a subsidiary of Byblos Bank establishedin 1983. In May 2001, Byblos Bank group signed a partnership with theFrench Bancassurance Group “Natexis Banque Populaire” which acquired34% of Adir.

ADIR operates insurance services for individual customers and professionalclients. Its products include life, fire, general accident and medicalcoverage. These products, in addition to providing non-interest income,present the Bank with cross-selling opportunities, which, in turn, allowbroader penetration of the Bank’s customer base, with many customerspurchasing two or more different product offerings.

In September 2007, marking the initial step in the geographical expansionof ADIR Lebanon in the MENA region, ADIR Insurance Syria was officiallyestablished with the partnership of Byblos Bank.

In 2008, ADIR Lebanon reported a growth of 32.8% in its total assets movingfrom USD 58 mn at year-end 2007 to USD 77 mn as at year-end 2008 withnet profit of USD 3.6 mn for the year 2008 compared to USD 2.7 mn for theyear 2007, implying a y-o-y growth rate of 35.2% in net profit.

ADIR Syria reported a growth of 15.4% in its asset base, moving from USD26 mn at year-end 2007, to reach USD 30 mn as at year-end 2008. Itgenerated USD 340,000 in net profit for the year 2008.

In total, the insurance activities of Byblos Bank generated 3% of the Group’scombined income in 2008.

The Bank recorded a 3.8%market share out of the totaltransactions value on theBeirut Stock Exchange in2008

“

The Bank is active in theinsurance field through itssubsidiary ADIR which isalso partially owned by theFrench BancassuranceGroup “Natexis BanquePopulaire”

“


Geographical coverage

Byblos Bank embarked on a geographical expansion in the mid-1970s tomitigate the surge in domestic risk following the start of the civil war. As aresult, the Bank has been present in Europe since 1976 after theestablishment of a sister bank in Brussels (1976) and branches in Paris(1980), London (1981) and Limassol/Cyprus (1984). In recent years, the Bankhas undertaken a number of steps to expand its business and improve itsmarket share and profile by setting up subsidiaries in key MENA countries.

To date, the international expansion of Byblos Bank has been mainlyorganic except its 100 percent acquisition of a bank incorporated inArmenia. In total, the Group maintains a significant international presencewith operations spread across 10 countries beyond Lebanon, spanningEurope, the Middle East and Africa.

In 2008, 22.4% of the Bank’s total assets and 20.1% of its net income werederived from outside Lebanon (including international activities booked inLebanon) compared to 12.1% and 2.1% respectively in 2004.

Going forward, the Bank aims at reaching a more balanced revenue mixbetween Lebanon and abroad. Within a five year period, managementbelieves Byblos Bank will be able to generate 40% of its profits from itsoverseas operations. The Bank’s long term objective concerning therevenue mix between Lebanon and abroad is to reach a revenue mixstructure of 50%-50%, suggesting a targeted equivalent contribution ofdomestic operations and foreign operations to the Group’s net income.

The below pie charts depict the breakdown of total assets and thebreakdown of net income by main entities for the year 2008. With acontribution of 7% and 5% to the Group’s asset base respectively, ByblosBank Europe and Byblos Bank Syria are the main international entities interms of assets for Byblos Bank’s international activities. The bulk of netprofit arises from operations in Sudan and Europe with contributionsestimated at 8% and 7% respectively.

Since the mid-seventies theBank has been present inEurope. In recent years it hasexpanded its business in keyregional markets

“4

In 2008, the Bank’sinternational operationsaccounted for 22.4% and20.1% of total assets andnet income respectively

“

The long term objective ofthe Bank is to reach abalanced revenue structurebetween Lebanon andabroad

“0%

5%

10%

15%

20%

25%

2004

12.1%

22.4%

20.1%

2.1%

2008

Figure 5: Share of international activitiesto total assets and to net profit (2004 vs. 2008)

Share of international activitiesto total assets

Share of international activitiesto net profit

Source: Byblos Bank

4


Europe

Byblos Bank Europe S.A. was initially founded in 1976. It is headquartered inBrussels and has branches in London and Paris.

For more than 30 years, Byblos Bank Europe has been accommodatingEuropean exporters in their foreign trade with the Middle East, North Africaand other African countries. The Bank provides commercial wholesale bankingservices and particularly trade finance in all its aspects. Through its branches inBrussels, Paris and London, Byblos Bank Europe supports Lebanese and Arabcompanies established in Europe and in African countries in terms of theirbusiness needs. In addition, the Paris branch provides banking services tocustomers located in French-speaking African countries whilst the Londonbranch provides services to customers located in the English-speaking Africancountries.

Byblos Bank Europe’s total assets grew by USD 54 mn in 2008, rising to USD844 mn by the end of 2008. Net profit reached USD 8.2 mn in 2008, comparedto USD 5.6 mn for 2007, implying a year-on-year 46.4% growth rate.

The European operations of Byblos Bank contributed 7% of the Group’s totalassets and net income in 2008.

Figure 6: Breakdown of total assets 2008

Figure 7: Breakdown of net income 2008

Europe

Lebanon (*)

1%

5%

5%

3%

7%

Invest

Insurance

Sudan

Syria

3%

8%

7% Europe

Lebanon (*)77%

3%

3% Invest

Insurance

Sudan

Syria

78%

78%

1%

5%

5%

3%

7%

3%

8%

7%

77%

3%

3%

Byblos Bank Europe SA isheadquartered in Brusselsand has branches in Londonand Paris. In 2008, itmanaged to grow its assetbase by USD 54 mn andregistered USD 8.2 mn in netprofit for the year

“

The European entitygenerates a substantial part(around 7%) of the Group’stotal assets and net income

“

Source: Byblos Bank

* Including Cyprus and Erbil (Iraq) branches, UAE and Nigeria representative offices

4

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Cyprus

Byblos Bank’s International Banking Unit was established in Limassol in1984. Following the change of regulations in Cyprus, since early 2006, it hasbecome an onshore branch of Byblos Bank.

Sudan

In 2003, after three decades of conducting business in Sudan with localbanks and selective customer base, Byblos Bank established Byblos BankAfrica, a fully-fledged Islamic Bank headquartered in Khartoum, Sudan.Byblos Bank is the main shareholder in Byblos Bank Africa with an equityparticipation of 56.9%. Other shareholders are the Vienna- based OPECFund for International Development (17.5%) and the ICD IslamicCorporation Development Bank (8.75%).

Byblos Bank Africa’s main lines of business are commercial banking, privatebanking and correspondent banking.

Byblos Bank Africa reported a 29.3% increase in its assets in 2008 rising fromUSD 242 mn as at year-end 2007 to USD 313 mn one year later. In terms ofnet profit, Byblos Bank Africa registered USD 9.6 mn in 2007 and in 2008. Itscontribution to the Group’s total assets and income stood at 3% and 8%respectively in 2008.

Going forward, Byblos Bank is targeting a 10% market share in Sudan withinfive years.

Syria

Founded in 2005, Byblos Bank Syria S.A is 41.5% owned by Byblos BankS.A.L which also holds the management control of the entity. A 51% stakewas acquired by Syrian investors and the OPEC Fund for InternationalDevelopment has joined in the capital with 7.5%. Byblos Bank Syria beganeffective operations around mid-2006 and completed its first full year ofoperations in 2007.

Byblos Bank Syria was the sixth bank to set up operations in Syria followinglegislation to reform and modernize the banking sector. Its operations arecarried out from its head office in the Abou Remmaneh district of Damascusalong with seven branches in Abou Remmaneh, Mezze, Aleppo, Homs,Lattakia, Tartous and Hama.

The Bank provides a wide range of retail products including housing, auto,personal loans as well as plastic cards. The bank saw its assets grow by 57%in 2008 ending the year at USD 585 mn, up from USD 371 mn at the end of2007. It reported USD 4.2 mn in net profit for 2008, which represents 3% ofthe Group’s total income.

Going forward, Byblos Bank is targeting a 10% market share in the Syrianbanking sector within five years.

Abu Dhabi

The group has had a representative office in Abu Dhabi, UAE since 2005.The representative office provides retail and corporate banking to itscustomers as well as private banking, correspondent banking and tradefinance. It is strategically located to serve a number of other regionalcountries including Qatar, KSA, Oman, Iran and Yemen.

Byblos operates an IslamicBank in Khartoum“

Byblos targets a 10% marketshare in Sudan within 5 years“Byblos Bank Syria is41.5% owned by ByblosBank and operates anetwork of sevenbranches in Syria

“

The Syrian entity managedto report USD 4.2 mn in netprofit for 2008, thuscontributing to 3% of theGroup’s total income

“


Armenia

Founded in 2007, Byblos Bank Armenia is the result of Byblos Bank Group’s100% acquisition of International Trade Bank (ITB), a bank incorporated inArmenia which has its main branch in Yerevan and three other branches inMalatia, Vanadzor and Amiryan. The newly-acquired bank operates as anindependent subsidiary of the Byblos Bank Group under the name ByblosBank Armenia. In June 2008, the EBRD and OFID also acquired stakes of 25%and 10% (respectively) in Byblos Bank Armenia’s capital.

The development of Byblos Bank Armenia is in line with the Bank’s strategyof diversifying its assets and revenues and expanding overseas. Armenia isviewed as a significant market for the Bank with high potential for retail andcommercial activities. Through its Armenian subsidiary, Byblos Bank aims atserving the Armenian Diaspora which is present in the USA, Europe,Lebanon, Syria and other parts of the world.

Byblos Bank Armenia had total assets of USD 20 mn and total shareholders’equity of USD 10 mn as of 31 December 2007, which increased to USD 45mn and USD 27 mn respectively by year-end 2008.

Byblos Bank Armenia reported a net loss of USD 0.8 mn in 2008.

Iraq

In 2007, Byblos Bank opened a direct branch in Erbil, Iraq. Plans areunderway to open another branch in Baghdad. Byblos Bank aims atreaching a 10% market share in the Iraqi banking sector.

Other opportunities

Byblos Bank is evaluating a number of potential opportunities in Jordanand Egypt, as well as the establishment of operations in Algeria, Iraq, theUAE and Yemen. In August 2008, the Bank obtained a license for arepresentative office in Lagos, Nigeria.

Byblos Bank entered theArmenian banking sectorthrough inorganic growth “

Byblos Bank Armeniareported net loss of USD 0.8mn in 2008“


Strategy

The Bank’s corporate strategy is focused on creating value for itsshareholders through continued domestic and regional growth,geographic and product diversification, operational efficiency, costcontainment and optimizing its capital structure. In order to realize theseobjectives, the Bank’s medium and long-term key strategies are as follows:

Strengthen its platform and consolidate its domestic positioning

The Bank intends to continue to enhance its domestic market penetration,increase market share and achieve a top three market share in each productthat it offers through:

. Continuing to grow organically by expanding its branch networkparticularly to target customers in previously under-served areasprincipally the Bekaa Valley, North Lebanon and South Lebanon.

. Launching a program of back office centralization and streamliningof productivity processes in order to boost customer services andsales.

. Pursuing its growth by focusing on selective acquisitions of smallerdomestic banks with significant synergies and complementary branchnetworks. Particularly given its track record in domestic acquisitions,the Bank believes it is well-positioned to benefit from the potentialconsolidation of the domestic banking sector, which remains highlyfragmented with 53 commercial banks, many of which are family-owned and lack competitive scale.

Continue to expand in regional growth markets

Geographic expansion is one of the Bank’s key strategic objectives as theBank intends to diversify its revenues in the MENA region, thus ensuring40% of assets and income from international activities in five years.

. The Bank plans to continue to expand in the MENA region by openingsubsidiaries and branches in selected countries and through selectiveacquisitions of established financial institutions that are able to addnew distribution capabilities while adopting the Bank’s corporateculture.

. The Bank believes that its entry into underdeveloped, high-growthmarkets with low levels of traditional banking activity will allow it toleverage its competitive advantages in terms of regional expertise andits strategic geographic position relative to other international players.

. Moreover, the Bank intends to target markets where it can benefitfrom the presence of the Lebanese Diaspora or significant trade flowswith Lebanon and gain a first-mover advantage.

In August 2008, the Bank obtained a license to open a representative officein Lagos, Nigeria and it is evaluating a number of potential opportunities inJordan and Egypt, as well as the establishment of operations in Algeria, Iraq,the UAE and Yemen. All targets are evaluated by the Bank in the context ofits strict returns criteria and its intention to focus on trade finance andcertain niche segments of the markets it enters.

Byblos Bank intends toconsolidate its domesticpositioning by expanding itsbranch and focusing onselective acquisitions ofsmaller banks

“

The Bank’s strategy alsorevolve around expanding inthe MENA region, specificallyin underdeveloped, high-growth markets with lowlevel of traditional bankingactivity

“

4


Enhance earnings stability through an improved business mix and riskprofile

The Bank will continue to strive to improve its capital and balance sheetmanagement in order to further enhance profitability and supportanticipated asset growth. The Bank aims to achieve a more balanced mix ofincome and assets both geographically and across products.

. The Bank intends to further develop fee-based products and servicesin order to achieve a more diversified stable revenue stream. Inparticular, the Bank plans to focus on maintaining its leading position intrade finance activities and developing further its treasury operations,investment banking activities and selected private banking services.Also, the Bank plans to take an active role in privatization/infrastructureprojects, M&A advisory services and venture capital funds.

. The Bank also intends to continue participating in the development ofthe Lebanese capital markets, engaging in relatively high-margininvestment banking transactions in order to generate enhanced fee-based income, and to expand its correspondent banking activities.

Enhance cost efficiency and profitability

Following the Bank’s achievement of a 47.38% cost-to-income ratio in 2008,which was below the sector average and one of the lowest among its peers,the Bank intends to reduce its cost-to-income ratio further by setting up anumber of measures, namely the implementation of a new technologyplatform in order to enhance the quality of service, increase productivityand lower costs.

Diversify further the Bank funding structure

The Bank intends to continue to strengthen its balance sheet with newsources of international and other longer-term funding, thereby reducingits dependency on local market funding and on medium-term and otherexpensive funding sources.

The Bank aims to achieve amore balanced mix of incomeacross products by furtherdeveloping fee-based productsand services and participatingin the development of theLebanese capital markets

“


4

Strong franchise in domestic retail banking and SME’s

2nd largest branch network in Lebanon, more concentrated in ruralareas compared to the sector generally

High level of cost efficiency, with cost-to-income ratio (47.38%) significantly below sector average

Stable ownership

No exposure to “toxic assets” and structured products

Strong risk management, with very low level of NPL/gross loans(at 3.49% for 2008) and high level of NPLs provisioning

Strong liquidity in both local and foreign currency

Strengths

4

Reliance on interest income

Negative contribution of the business in Armenia to the Group’s totalincome

Moderate profitability ratios

Weaknesses

4

Ability to attract international partnerships

Targeted presence to serve Lebanese and Arabs in Europe and Africa

Well-capitalized bank (CAR at 12.84% as at end September 2008),allowing Byblos Bank to acquire peers in neighboring countries

Potential consolidation by acquisition of local banks

Regional expansion leading to diversification of revenues

Potential to improve the cost-to-income ratio

Opportunities

4

Lower interest spreads in 2009

High exposure to sovereign debt

Deterioration of the asset quality in light of the global economic downturn

Chronic political instability in Lebanon

Persistent economic imbalances in the quasi absence ofadjustment reforms

Impact of the global financial crisis on the Lebanese economyand banking sector

Threats

SWOT analysis4


Latest developments

The Bank recently acquired Unicredit Banca Di Roma SpA, Lebanon Branchin line with the Bank’s continuing external growth strategy.

Also, the Bank recently listed Global Depositary Receipts on the LondonStock Exchange with an initial market value of approximately USD 80 mn,effective February 2009.

Net Profit of USD 24.96 mn was declared for Q1 09, indicating an 18.6%increase y-o-y. This was driven by an operating income growth of 41.4% andan operating expenses growth of 23.8%, leading to profit before taxes increaseof 30.4%. Earnings were additionally affected by the provision expenserecorded, in contrast to Q1 08 results where no provisioning was witnessed.

Loans remained flat q-o-q as a result of a cautious attitude amidst theuncertain political environment that prevailed before the parliamentaryelections. On the other hand, deposits (including related parties deposits)displayed a positive 4.6% q-o-q growth reaching USD 8,748 mn. As a matter offact, Byblos Bank has retained additional liquidity as reflected by the loans-to-deposits ratio decreasing from 33.3% in Q4 08 to 31.5% in Q1 09. Moreover, itis worth mentioning that due from banks increased by 6.1% over the quarterwhile due to banks retreated by 8% as a result of the increased fear and riskaversion that spread in the aftermath of the financial turmoil.

4

Net interest incomeNet fees & commissionsTrading and investment incomeNon - interest incomeOther operating incomeOperating incomeTotal operating expensesCredit loss expenseProvision for the decrease in valueof other financial instrumentsProfit before taxesIncome tax expenseNet profit

Table 2: Byblos Bank’s Q1 2009 summary income statement

USD mn Q1 2008 Q1 2009

Source: Byblos Bank

y-o-y %

44.0517.830.28

18.101.43

63.59(37.18)(0.84)

-

25.57(4.53)21.04

61.6819.837.14

26.981.23

89.88(46.02)(4.19)(6.34)

33.34(8.38)24.96

40.0%

49.0%

41.4%

30.4%

18.6%

Cash & balances with BDLFinancial instrumentsDue from banksLoans & advances Other assetsTotal assetsDue to banks and other financial institutionsDeposits Subordinated debtOther liabilitiesShareholder's equityTotal liabilities and shareholders' equity

Table 3: Byblos Bank’s Q1 2009 summary balance sheet

USD mn Q4 2008 Q1 2009

Source: Byblos Bank

q-o-q %

1,3434,9901,6852,786434

11,238973

8,363196632

1,07411,238

1,4645,2181,7882,754394

11,617895

8,748200669

1,10511,617

9.1%4.6%6.1%-1.2%-9.3%3.4%-8%4.6%1.9%5.9%2.9%3.4%


Source of funds

Customer deposits

Customer deposits are a major constituent of sources of funds,accounting for 74% of total liabilities and shareholders’ equity in FY 08.We expect Byblos’ share of deposits to total liabilities and shareholder’sequity to increase slightly to 75.6% in 2009e and to remain constant overthe projection period.

Nonetheless, Byblos bank has witnessed a significant increase incustomer deposits in 2008 as deposits grew at a 15% rate to reach USD8,292 mn despite the unstable political situation that dominatedLebanon and the global financial crisis that started in the last quarter of2008.

We expect customer deposits to grow at a CAGR of 10.6% over the 2009-2013 period, to reach USD 13,703 mn at the end of the projection periodwith the bulk of the aggregate growth to be derived from the regionalexpansion strategy into under-banked countries with substantial tradefinance activity.We have forecasted a 15% customer deposits growth for 2009e,decelerating gradually to 8% in 2012e.

Shareholders’ equity

Byblos Bank has a strong capital position, holding a Basel II capitaladequacy ratio of 12.13% as of Q3 08, significantly above regulatory levelsof 8% currently required by the Central Bank of Lebanon. In 2009, the bankcalled existing preferred shares series 2003, issued at a coupon of 12%, andis in the process of replacing them with a new issue of up to USD 200 mn ata lower coupon rate of 8% in 2009.

FinancialHighlights and

Forecasts

Byblos Bank’s deposits grewat a 15% rate in 2008 toreach USD 8,292 mn despitethe unstable politicalsituation that dominated inLebanon

“

We expect customer depositsto grow at a CAGR of 10.6%over the 2009-2013 period“

Byblos Bank holds a Basel IIcapital adequacy ratio of12.13% as of Q3 08,significantly above regulatorylevels of 8% currently requiredby the BDL.

“

4

USD mn

Figure 8: Customer deposits and growth rates

Customer deposits (lhs)

% Growth (rhs)

15.000

10.000

5.000

0

2007

2008

2009

e

2010

e

2011

e

2012

e

2013

e

0%

10%

5%

15%

20%

Source: FFA Private Bank

4


Uses of funds and asset allocation

As a result of a surge in lending activity, Byblos Bank is anticipated towitness an asset allocation shift in line with the general trend in theindustry, which would lead to a shift of the balance sheet structure, tohigher interest earning assets and results in a better asset deployment.Also, we expect this trend to spread even further in the event thegovernment undertakes privatization reforms.

The loan to total assets ratio reached 25% in FY 08, slightly above the sectoraverage of 22.3%. We forecast this ratio to increase gradually to 29% by theend of 2013e to the detriment of financial assets which are expected todecline from 44% to 39% over the projection period, underlying adiminishing exposure to government securities.

Loans

Although loans witnessed a 25% growth y-o-y reaching USD 2,783 mn in2008, in Q1 09 they remained flat. We expect loans to grow at a slower paceat a CAGR of 13.9% over the 2008-2013 period, and to record a 12.8%growth in 2009.

4

Figure 9: Asset Allocation

Cash and balances with BDLFinancial assetsDue from banksLoans and advancesOther assets 0%

10%20%30%40%50%60%70%80%90%

100%

2013

e

2012

e

2011

e

2010

e

2009

e

2008

e

2007

13%

40%

19%

5%23

%

12%

44%

15%

5%25

%

12%

44%

15%

4%25

%

12%

42%

15%

4%26

%

12%

42%

15%

4%27

%

12%

40%

15%

4%28

%

13%

39%

15%

4%29

%


We expect the Bank to witness ashift in its balance sheetstructure, resulting from agrowth in loans and a retreat insovereign debt exposure, in linewith the general trend in theindustry

“4

USD mn

Figure 10: Total loans and growth rates

Total loans (lhs)

% Growth (rhs)

6.000

4.000

2.000

0

2007

2008

2009

e

2010

e

2011

e

2012

e

2013

e

0%

5%

10%

15%

20%

25%

30%


4

We expect loans to grow at aCAGR of 13.9% over theprojection period“


Byblos Bank’s loans-to-deposits ratio stood at 34% in FY 08 and is estimatedto witness a slight increase, reaching 39% by 2013e. Despite this implicationof lower liquidity levels, the ratio is still low when compared to internationalstandards.

In addition, Byblos’ loan book is heavily reliant on the retail sector; retailloans constituted 23% of total loans in 2008 and recorded a 35% growth y-o-y, in line with the Bank’s strategy to remain a dominant player in retailbanking by capturing further market share in this segment.

Sovereign exposure

The decreasing proportion of financial assets to total assets is expected tobe mainly driven by a diminishing exposure to government securitieswhich are expected to decline from 49.9% in 2008 to 45.3% in 2013e.

The loans-to- deposits ratiois expected to witness aslight retreat moving from34% in FY 08 to 39% in2013e, which is stillconsidered high byinternational standards

“USD mn

Figure 11: Loans-to-deposits ratio

Customer deposits (lhs)

% Loans-to-deposits ratio (rhs)

Total loans (lhs)

12.000

16.000

8.000

4.000

0

2007

2008

2009

e

2010

e

2011

e

2012

e

2013

e

0%

10%15%

5%

20%

30%25%

40%35%

45%


4

Figure 12: Sovereign exposure

Sovereign exposure

0%

10%

20%

30%

40%

50%

60%

2001

3e

2001

2e

2001

1e

2001

0e

2009

e

2008

2007

46.5

%

49.9

%

49.1

%

48.5

%

47.3

%

46.3

%

45.3

%


4


NPLs and provisions

In 2008, despite a rapid surge in lending activity, Byblos Bank’s asset qualityremained sound as witnessed by a decline in the NPL ratio from 4.8 % in2007 to 3.5% in 2008. This superior asset quality is due to the Bank’s tightregulations in this regard as loans are mainly originated by the bank andrarely bought on the secondary market. In addition Byblos Bank followsstrict underwriting criteria and has a strong risk management.

We expect the NPL ratio to stand at 3.6% in 2009e and gradually increase toreach 4.7% by 2013e in parallel of the forecasted increase in loan exposure,with loans standing at USD 3,137 mn and USD 5,331 mn respectively. At thesame time, and as a consequence of the increase in the NPL ratio, weanticipate provisioning costs to increase moderately to USD 7 mn in 2010eand USD 9 mn in 2011e.

With regard to the provision coverage, it is worth mentioning that the Bankhad a loan loss provision to non performing loans ratio (LLP/NPL) of 82.6%in 2007, above the sector average which stood at 77.2%.

Going forward, we expect Byblos Bank to maintain a strict provisioningpolicy as witnessed by the LLP to NPL ratio, which is forecasted to be in therange of 83%-84% over the projection period.

Net interest income

In the aftermath of the Lehman Brothers collapse, a trend of falling interestrates began to spread as central banks around the world started to cutprime rates. Libor was also drastically affected, as suggested by the threemonths Libor falling from its high of 5.7% in FY 07 to 0.5% in July 2009. Atthe current Libor rates, banks are witnessing a contraction on spreadsresulting in pressures on the net interest income, with lower interbank rateson deposits, lower interest rates on deposits at Central Bank and lowerinterest rates on loans which are mostly pegged to Libor. In contrast,interest expense has also declined but at a slower pace than interestincome because of the low elasticity of interest rates to deposits.Accordingly, the spread has significantly shrunk. As for Byblos bank, the net interest spread has decreased in line with thegeneral trend in the industry but at a significantly lower pace than its peers.This is due to Byblos Bank’s higher proportion of LBP deposits and to ahigher proportion of variable rate loans with interest rates floors.

4

Figure 13: NPLs and provisioning

NPL/Gross loans (lhs)

0%

1%

2%

3%

4%

5%

6%

81.5%

82%

82.5%

83%

83.5%

84%

84.5%

2001

3e

2001

2e

2001

1e

2001

0e

2009

e

2008

2007

LLP/NPL (rhs)


Byblos Bank boasts a soundasset quality as reflected by theNPL ratio that stood at 3.5% in2008. We expect the ratio togradually increase, thusreaching 4.7% by 2013e.

“4

The provisioning policy isexpected to remain strict as theLLP/NPL is expected to be in therange of 83%-84% over theprojection period

“

Byblos Bank’s net interestspread has decreased in linewith the general trend in theindustry but at a significantlylower pace than its peers, dueto Byblos’ higher proportion ofLBP deposits

“


4

As a result of this policy, the interest spread gap between Byblos Bank andits peers has shrunk considerably.

In 2009, we expect the interest rate spread to drop by an additional 17 bps. Going forward, this figure is anticipated to gain momentum again andgradually increase from 1.88% in 2009e to 2.12% in 2013e, as we expect thedownward pressures on Libor to ease over the remainder of the projectionperiod.

As a result of the contraction in net interest spread in 2009, we expect thenet interest income growth to significantly decelerate this year, movingfrom 28% in 2008 to 7.57% in 2009e. Going forward, we anticipate thisgrowth to recover as witnessed by a CAGR of 12.73% over the forecastperiod.

We expect Byblos Bank’s netinterest spread to drop by anadditional 17 bps in 2009. Thefigure is expected to gainmomentum and increase overthe projection period

“Figure 14: Net interest margin vs. Net interest spread

Interest Spread

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2001

3e

2001

2e

2001

1e

2001

0e

2009

e

2008

Net Interest Margin


4


Non-interest income

The non-interest income of Byblos Bank constituted 29.41% of total incomefrom operations in FY08. We expect non-interest income to increase by a10.8% CAGR over the projection period, moving from USD 98 mn in 2008 toUSD 164 mn in 2013e but to remain at the same level as a share of totalincome. This is the result of a less aggressive business line diversificationstrategy compared to Bank Audi and Blom Bank, as Byblos Bank’s strategyrevolves around maintaining its core image as a traditional bank.

Fees and commissions constitute the biggest portion of net non-interestincome amounting to a 72% share in 2008. Net fees and commissions,which are a more stable source of revenue compared to other non-interestincome components, are forecasted to have a growth of 12% in 2009e,decelerating to 8% in 2013e.

4

Figure 15: Non-interest income vs. interest income

Non-interest income

Interest income

0

100

200

300

400

500

2013

e

2012

e

2011

e

2010

e

2009

e

2008

2007

USD mn

184

76

236

98

254

116

288

127

335

139

381

152

430

164

600

700


The non-interest income ofByblos Bank constitutes29.41% of total income and isexpected to grow at a 10.8%CAGR over the projectionperiod

“4

Fees and commissionsrepresent 72 % of net noninterest income “ Figure 16: Non-interest income breakdown in 2008

Other operating income

Net gain or loss onfinancial assets

Net trading income

Net fees and commissions

72%

12%

10%

6%


4


Returns

Byblos Bank’s net income stood at USD 122 mn in 2008, recording a 23%increase y-o-y. We expect the Bank’s bottom line to increase steadily at aCAGR of 15.5% over the forecast period and reach USD 251 mn in 2013e, onthe back of a loan-book expansion coupled with a higher contribution ofregional entities to the Group’s net income. Moreover, net income growthis expected to be bolstered by higher net interest spread resulting fromeasing pressures on Libor coupled with a significant deposit growth.

The growth in net income will directly impact the return ratios ashighlighted by the ROAE steadily increasing from 13.4% in 2008 to 16.1% in2013e. As for the ROAA, it will pursue the same rising trend moving from1.10% in 2008 to 1.35% in 2013e.

Efficiency

Historically, Byblos Bank has pursued a strict cost-containment policy. In2008, the Bank’s achievement of a 47.38% cost-to-income ratio was amongthe lowest in the Lebanese banking sector and was a result of significantefforts made in the centralization and automation of the processing ofbanking operations.

On the back of a loan bookexpansion coupled with ahigher contribution ofregional entities to theGroup’s net income, weexpect Byblos Bank’s netincome to increase at a CAGRof 15.5% over the projectionperiod

“4

USD mn

Figure 17: Net income and growth rates

Net profit (lhs)

% Growth (rhs)

300

250

200

150

100

50

0

2007

2008

2009

e

2010

e

2011

e

2012

e

2013

e

0%

5%

10%

15%

20%

25%


4

4

USD mn

Figure 18: Cost-to-income ratio

Total income (lhs)

Cost-to-income ratio (rhs)

Total cost (lhs)

500

400

300

200

100

600

700

0

2007

2008

2009

e

2010

e

2011

e

2012

e

2013

e

40%

44%

46%

48%

42%

50%

54%

52%


4


Going forward, Byblos Bank is expected to maintain an adequate level ofcost efficiency despite its domestic and regional expansion strategy. Thebank intends to compensate the costs resulting from the setting up of newbranches in Lebanon and the penetration of new markets by deploying anefficient cost-control approach.

We anticipate the cost-to-income ratio to gradually decrease from 47.38%in 2008 to 44.58% by the end of the projection period, on the back of aconsiderable surge in revenues in parallel with a strict cost containmentstrategy.

We expect Byblos Bank tomaintain an adequate level ofcost efficiency“


Valuation Methodology

Our approach to providing a fair value estimate for Byblos Bank is based ona Discounted Equity Cash Flow (DECF) methodology.

Equity cash flows are calculated by subtracting preferred share dividendsfrom net income to derive the attributable earnings to common andpriority shareholders, and the retention required to maintain a capitaladequacy ratio in excess of 8%.In other words, the discounted cash flows are the dividends to bedistributed in addition to excess capital to reach the target capitaladequacy ratio.

Our projection spans a five year period followed by a 15 year fading period.Additionally, the terminal value was calculated using a perpetual growthrate of 3%.

For the purpose of this valuation, common and priority shares have notbeen segregated as priority shares are to be converted into common equityby 2010.

Discount rate calculation

The discount rate was derived using the capital asset pricing modelweighted by size of geographical operation.

Given the lack of data and financial products in the region, discount rateswere calculated using several methodologies:

Lebanon operations

We have chosen to calculate the foreign currency and local currency riskfree rates separately and allocate their respective weightings on a pro ratabasis to the capital structure of the Bank.

The foreign currency risk free rate is based on the Eurobond 2021 yield of7.75%.

Given the absence of long-term government securities denominated inLBP, we have opted to calculate the LBP risk-free rate by deriving the spreadbetween comparables, namely, April 2012 Treasury bills (denominated inLBP) and March 2012 Eurobonds (denominated in USD), and adding thespread to the USD Eurobond 2021.We believe this would reflect what the yield on a long-term bonddenominated in LBP would have been.

The resulting local currency risk-free rate is 11.18% calculated as follows:7.75% + (8.93% - 5.5%).

Assuming an equity risk premium of 7.5% and a Beta of 1, the weighteddiscount rate on Lebanese operations is 16.45%.

Valuation

Our valuation methodologyis based on a DiscountedEquity Cash Flow (DECF)“

4

4

The discount rate wasderived using the capitalasset pricing modelweighted by size ofgeographical operation

“


Foreign operations

We have estimated the discount rate of the European, Sudanese and Syrianoperations by adding the country risk premium to the US risk-free rate andthe estimated equity risk premium.

The different steps are as follows:

The US risk free rate was calculated by averaging the yield on the 10-year and30-year US treasury bonds resulting in a rate of 4.1%. The country risk premium was derived by conversion of the country ratingor equivalent to a rate of 0.75%, 9%, and 7.5% for Europe, Sudan and Syriarespectively.

The resulting discount rates are 12.35% for Europe, 20.60% for Sudan and19.1% for Syria, using the same equity risk premium.

By weighting the discount rate of each geographical location to itscontribution to operations of the Bank, we reach a weighted discount rateof 16.39%.

Fair value estimate and recommendation

Based on our projections, our fair value estimate derived from discounteddividends attributable to common and priority shareholders and excesscapital amounts to USD 2.47 per share, implying a P/B 09 of 1.38 and a P/E09 of 8.0.

We, accordingly, assign a Buy Recommendation to Byblos Bank.

It is worth noting that an improvement in the country risks associated withthe operations of Byblos Bank and further geographical diversification toless risky countries would lower the discount rate and positively impact thevaluation of the Bank.

On the other hand, any deterioration of the country rating will have anegative effect on the price of the shares, thus we have performed asensitivity analysis to pinpoint the result of a 2 percent change in thediscount rate on the fair value estimate of the stock price.

Table 4: Sensitivity analysis

4

Our fair value estimateamounts to USD 2.47 pershare, implying a P/B 09 of1.38 and a P/E 09 of 8.0

“

Discount rate 18.39% 16.39% 14.39%

Fair value per share USD 2.19 USD 2.47 USD 2.86


Financial Statements

2013e2012e2011e2010e2009e20082007In USD mn

2,30025399

1,4063,9471,4902,7695,33120206241148

18,209

13,7031,4138711431024134715275234

1,534

18,209

2,08523492

1,3083,8451,3802,5644,74517196229134

16,829

12,6881,3178110628522930616058187

1,412

16,829

1,87121785

1,2173,7491,2782,3744,21814187218122

15,549

11,7481,203749826721827016845150

1,309

15,549

1,75619777

1,1123,5561,1612,1583,67411178208111

14,201

10,6801,125699023820823817734120

1,223

14,201

1,50116269965

3,3381,0371,9273,13710169198101

12,615

9,53694859792211982101872696

1,056

12,615

1,34314060854

3,064862

1,6762,783

816118992

11,230

8,29297055711771891851962077996

11,230

1,18655560

1,347784

1,0961,8432,2181412817677

9,486

7,20566940571791761632201251713

9,486

- Cash & Balances with Central Bank- Financial assets held for trading- Financial assets given as collateral- Available for sale financial instruments- Financial assets - loans & receivables- Held to maturity financial instruments- Due from banks- Loans & advances (net of provisions)- Loans & advances to related parties- Property and equipment, net- Bank acceptance- Other assets

• Total assets

- Customer deposits- Due to banks- Due to Central Bank- Deposits to related parties- Debt issued and other borrowed funds- Engagement by acceptance- Other liabilities- Subordinated loan- Provisions- Minority interest- Total shareholders' equity

• Total liabilities and equity

Balance Sheet 4

2013e2012e2011e2010e2009e20082007

1,195(766)

430

1143119

164

(143)(15)(23)(105)(3)

306(55)251(14)

1,073(692)

381

1062917

152

(128)(14)(24)(97)(2)

267(48)220(13)

955(620)

335

972715

139

(114)(13)(26)(89)(2)

231(41)189(11)

834(545)

288

882514

127

(100)(13)(26)(81)(1)

195(34)160(9)

728(474)

254

792313

116

(89)(12)(26)(73)(1)

169(31)138(8)

688(452)

236

711612

98

(82)(11)(29)(65)0

147(25)122(8)

623(438)

184

54192

76

(65)(9)(3)(58)(2)

123(24)99(5)

- Interest and similar income- Interest expense and similar charges

• Net interest income

- Net commissions- Net profit from financial operations- Net other income

• Net non-interest income

- General & administrative expenses- Depreciation & amortization- Provisions- Other operating expense- Other expenses

• Profit before tax- Income tax• Net profit- Minority interest

Income Statement4

In USD mn



2013e2012e2011e2010e2009e2008Growth

8.6%8.2%12.3%8.0%8.4%7.8%14.3%

1,5348.4%

16.1%1.35%7.25%5.13%2.12%2.61%

44.58%

423-

0.5614%3.262.690.6840%0.196

10.40%

7.9%8.2%12.5%8.0%8.2%8.0%16.0%

1,4128.4%

15.2%1.28%7.05%5.00%2.05%2.51%

45.25%

423-

0.4916%3.732.400.7640%0.1698.97%

7.0%9.5%14.8%10.0%9.7%9.5%18.1%

1,3098.4%

14.1%1.20%6.84%4.88%1.96%2.40%

45.94%

423-

0.4218%4.322.150.8540%0.1437.58%

15.8%12.6%17.1%12.0%12.7%12.3%15.8%

1,2238.6%

13.2%1.12%6.63%4.75%4.75%2.29%

46.81%

423-

0.3615%5.121.950.9340%0.1246.58%

6.0%12.3%12.8%15.0%12.7%12.8%13.5%

1,0568.4%

12.7%1.10%6.52%4.64%1.88%2.28%

47.20%

2172060.3114%5.901.791.0240%0.1085.75%

39.8%18.4%25.4%15.1%18.9%17.0%23.0%

9988.9%

13.4%1.10%7.13%5.09%2.05%2.45%

47.38%

2172060.2721%6.741.651.1047%0.1055.57%

- Total equity- Total assets- Total loans- Customer deposits- Earning assets- Interest bearing liabilities- Net profit

- Shareholders’ equity- Equity / assets

- ROaE- ROaA- Interest income / Interest earning assets- Interest expense / Interest bearing liabilities- Interest spread- Net interest margin

- Cost/income

- Number of common shares in issue (mn)- Number of priority shares in issue (mn)- EPS- EPS growth (%)- P/E (x)- BVPS- P/BV (x)- Dividend pay-out ratio (%)- DPS- Dividend yield (%)

KPIs and Key ratios 4

2013e2012e2011e2010e2009e2008Capital

2013e2012e2011e2010e2009e2008Earnings and Margins

2013e2012e2011e2010e2009e2008Efficiency

2013e2012e2011e2010e2009e2008Share data

Documents

Byblos Bank - FFA Private Bank BYBLOS B… · Byblos Bank’s net income stood at USD 122 mn in 2008, recording a 23% increase y-o-y. We expect the Bank’s bottom line to increase