BLOM BANK - FFA · 52 – Wk range USD 57.5 - 106.2 Sh arep ic nf om t * Blom Bank shares...

Conservative banking with high profitability

Market leader in profitability

Blom Bank boasts an above average profitability driven by a strongdeposit franchise and a conservative risk policy and is also supported bya strict cost containment strategy. The Bank results in 2008 reported anet income figure of USD 252 mn, implying a 22.9% y-o-y growth andmaking it rank first in terms of net profit.

Diversifying revenue streams in terms of business lines andcountry of operations

As part of Blom Bank’s strategy to become a regional universal player,the Bank has, in recent years, embarked in a regional expansionfollowing a successful diversification of its business lines. Blom Bankcurrently offers a full array of banking services (ranging from retail andcorporate banking to investment and private banking as well asbrokerage, insurance and Islamic banking) in 12 countries (includingLebanon) across Europe, the Gulf region and the Middle East.

We expect Blom Bank to witness a decent growth in itsbalance sheet, to continue generating strong profits andoverall financial situation to remain sound

We expect the Bank’s deposit base and loans portfolio to grow at a CAGRof 12% and 13.3% respectively. Net income will likely grow at a CAGR of13.5% throughout the forecast period. Liquidity levels are expected toremain high coupled with a sound level of capitalization. However assetquality may slightly deteriorate as NPL ratio increase on the back of asubstantial surge in the lending activity.

We value Blom Bank at USD 91.6 per share

Our fair value estimate, derived from the DECF projections equals to USD91.6 per share, implying a P/B 09 of 1.41 and a P/E 09 of 7.40. We,accordingly, assign a buy recommendation to Blom Bank

Key performance indicators:

4

BLOM BANKEquity Research August 13th, 2009

Sector: BankingCountry: Lebanon

Current price*: USD 79.25

Target price: USD 91.6

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.

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

756225475

1.51%18.5%114.3821.263.730.69

2013e

663207415

1.45%18.4%99.2518.584.260.80

2012e

564190356

1.40%18.1%85.9315.964.970.92

2011e

481174307

1.35%17.7%74.5213.775.761.06

2010e

417160276

1.38%18.1%64.8612.386.401.22

2009e

410150252

1.40%17.9%55.9611.277.031.42

2008

Listing Beirut Stock ExchangeListing GDRs: London Stock Exchange Reuters code: BLBDF.BY, BLBDQ.L, BLOM.BYBloomberg code: BLBD.LB, BLBD.LI, BLOM.LBIMarket cap: USD 1703.9 mnNumber of common shares: 21.5 mn

Share data

YTD r 8.8%1M r 2.8%3M r 23.4%12M r -23.8%52 – Wk range USD 57.5 - 106.2

Share price information*

Blom Bank shares performance

* Blom Bank shares closing as of the 13th of August 2009

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

USD

Aug 08

Sep 08

Oct 08

Nov 08

Dec 08

Jan 09

Feb 09

Mar 09

Apr 09

May 09

Jun 09

Jul 09Aug 09

120

100

80

60

40

20

0

4

Contacts

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

Analyst: Raya Freyha [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

1

Investment Summary 2

Company Overview 4- Brief background 4- Capital history and shares listing 4- Ownership structure 5- Corporate structure 6- Business lines 7- Geographical coverage 10- Strategy 13- SWOT analysis 14- Latest developments 15

Financial Highlights and Forecasts 16- Balance sheet analysis 16

- Customer deposits 16- Other funding sources 17- Lending 17- Sovereign exposure 19

- Income statement analysis 20- Revenue mix 20- Net interest income 20- Non-interest income 21- Cost efficiency 22- Returns 22

Valuation 24- Valuation methodology 24- Discount rate calculation 23- Fair value estimate and recommendation 25

Financial Statements 26- Balance sheet 26- Income statement 26- KPIs and key ratios 27

Contents

EQUITY RESEARCH BANKING - BLOM BANK

Only sixteen years after its establishment in 1951, Blom Bank had grown tobe a major player in the Lebanese banking sector. In contrast to its mostprominent competitors, namely Bank Audi and Byblos Bank, Blom Bank hasrefrained from participating in the consolidation of the Lebanese bankingsector and instead has pursued a more organic growth in the domesticmarket. Today, the Bank operates a network of 56 branches in Lebanon andcontinues to play a leading role in the sector, having ranked among the toptwo banks in Lebanon for all major criteria in 2008. Notably, its net profit ofUSD 251.6 mn at year-end 2008 makes it the most profitable bank inLebanon.

Over the years, the Group has consolidated its universal banking profile,covering a large spectrum of banking services. Together with itssubsidiaries, the Bank provides all banking activities (retail, corporate,investing and private) as well as insurance, brokerage activities, assetmanagement and Islamic banking.

Blom Bank began its geographical expansion in the mid-1970s and today israpidly increasing its international presence. The Group is currently presentin several European and Middle Eastern countries beyond Lebanon. TheEuropean countries of operation include France, England and Romania aswell as Switzerland. Blom Bank also operates a direct branch in Cyprus. Asfor its presence in the Middle East, Blom Bank provides banking services inthe three markets of Egypt, Syria and Jordan and has recently receivedlicenses to operate in Qatar for commercial and private banking activitiesand in Saudi Arabia for investment banking activities.

Blom Bank’s primary strategic objective is to maintain its leading position inLebanon. On the international level, Blom Bank is looking to furtherconsolidate its presence abroad in order to reach a balanced breakdown ofearnings between Lebanon and its affiliates abroad.

With regard to H1 09 results, loans and advances grew by 3.6% during thefirst half of the year attaining USD 3,598 mn, while total deposits expandedby 10.5% over the same period to reach USD 16,691 mn. Non-interestincome retreated, displaying a 8.9% y-o-y decrease. As for the net interestincome, it grew by 7.6% y-o-y despite pressures on interest spreads. Netprofit of USD 138.3 mn was declared for the first half of the year, indicatinga 5.8% y-o-y increase in the bottom line results.

Based on Blom Bank’s commitment to further expand its franchise in theregion and on the fact that interest rates in Lebanon are consideredattractive compared to other countries, we anticipate customer deposits toregister a 17% y-o-y growth in 2009e. We believe this growth will betriggered by an improvement in Lebanon’s overall economic situation inlight of a renewed confidence in the economy as a whole during the firsthalf of 2009. As a result of an anticipated upturn in international interestrates as pressure on Libor eases, this pace of growth is expected togradually decelerate over the forecast period and reach 9% in 2013e. More generally, we expect customer deposits to grow at a 12% CAGR overthe projection period to reach USD 26,425 mn in 2013e, compared to aCAGR of 15.96% for the 2002-2008 period.

Blom Bank demonstrated a robust capital level in 2008 with a Basel II capitaladequacy ratio of 12.14%. This places it comfortably above the requiredratio of 8%. Going forward, we expect Blom Bank to remain soundlycapitalized although no capital increase is expected in the near future.

In contrast with the sluggish lending activity that prevailed before 2007,loans growth accelerated considerably in 2007 and 2008, as reflected by a25.3% growth in FY08. During the first half of 2009, loans grew by 3.6%,attaining USD 3,598 mn by the end of June 2009. Looking ahead, we have

Investment Summary

2EQUITY RESEARCH BANKING - BLOM BANK

adopted a conservative approach as our expectations are based onsustained but slower growth figures compared to the past two years. Weexpect the lending business to pick up in the 2nd half of 2009 resulting in agrowth rate of 13.93% for the year. We have anticipated the loans growthto be sustained throughout the forecast period as reflected in a CAGRstanding at 13.29%. We expect this growth pattern in the lending portfolioto be mainly driven by a surge in demand from the private sector coupledwith an increasing contribution of regional entities to the Group’s lendingportfolio.

We expect the NPL ratio to increase gradually from 3.9% in FY08 to 4.7 % in2013e to reflect a possible slight deterioration in the quality of incrementalloans and potential pressure on the economic environment. With regard tothe coverage ratio, we have assumed that it will stay close to 99% over theforecast period, reflecting the Bank’s strict operational and credit riskmanagement policies.

In 2009e, we expect Blom Bank’s net interest income growth to decelerateto 1.7% reflecting the current market conditions, specifically on the foreigncurrency spreads which are expected to remain under pressure during theyear. Looking ahead, we anticipate the net interest income to witness afaster growth as a result of higher spreads and a deposit base expansion.Net interest income growth is expected to be in the range of 14%-17.5%between 2010e and 2013e, which would move the net interest incomefrom USD 417 mn by year-end 2009e to USD 756 mn by the end of 2013e.

Looking ahead, we anticipate non-interest income to witness a slowergrowth compared to 2008, as reflected by a CAGR of 8.5% over theprojection period, reaching USD 234 mn in 2013e; with 6.9% growthexpected for 2009e.

As a result of the Bank’s organic and gradual growth coupled with a strictcost containment strategy, Blom Bank’s cost-to-income ratio stood at 42.9%in FY08, significantly below the sector average. Looking ahead, Blom Bank’scost-to-income ratio is expected to slightly increase in 2009e, as costs willconsiderably rise on the back of an aggressive regional strategy revolvingaround the launch of the Saudi and Qatari entities and the deployment ofadditional branches in existing countries of operations. Starting 2010e, theBank’s cost-to-income ratio is expected to gradually decrease moving from43.64% in 2009e to 40.85% in 2013e.

The bottom line figure is expected to grow at a slower pace compared to2008 as reflected by a CAGR of 13.5% over the projection period. However,we believe this figure reflects a solid growth pattern which would mainly bedriven by a decent loan book expansion coupled with a higher contributionof regional entities to the Group’s net income further supported by a highlevel of cost efficiency.

Blom Bank boasted ROAA and ROAE of 1.40% and 17.9% respectively in2008. The returns ratios are expected to gradually increase to reach 1.51%and 18.5% respectively in 2013e on the back of higher net profits.

Our approach to providing a fair value estimate for Blom Bank is based on adiscounted Equity Cash Flow (DECF) methodology. Based on ourprojections, our fair value estimate derived from discounted dividendsattributable to common shareholders and excess capital amounts to USD91.6 per share, implying a P/B 09 of 1.41 and a P/E 09 of 7.40.

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


Brief background

Only sixteen years after its establishment in 1951, Blom Bank had grown tobe a major player in the Lebanese banking sector. In contrast to its mostprominent competitors, namely Bank Audi and Byblos Bank, Blom Bank hasrefrained from participating in the consolidation of the Lebanese bankingsector and instead has pursued a more organic growth in the domesticmarket. Today, the Bank operates a network of 56 branches in Lebanon andcontinues to play a leading role in the sector, having ranked among the toptwo banks in Lebanon for all major criteria (assets, deposits, loans,shareholders’ equity and net profit) in 2008. Notably, its net profit of USD251.6 mn at year-end 2008 makes it the most profitable bank in Lebanon.Moreover, the FY 2008 results reveal that Blom Bank managed to register agrowth of 9.9% and 23.1% in its deposit base and in its loan portfoliorespectively.

This outstanding performance came on the back of a dynamic strategybased on a geographical expansion coupled with diversification of businesslines. This strategy is helping the Bank achieve recurrent and increasinglydiversified revenues. In addition, the Bank’s profitability has been greatlyfacilitated by an aggressive cost containment policy.

In the mid-1970s, Blom Bank embarked on a geographical expansionstrategy and evolved a few years later towards being a regional group.Currently the Bank’s international presence covers 11 countries acrossEurope, the Gulf and the Middle East. In 2008, 32.1% of assets, 40.7% ofcapital and 28% of earnings were derived from Blom Bank’s operationsoutside Lebanon, with the European and the Egyptian subsidiariesrepresenting the largest contributors to earnings outside Lebanon. In total,Blom Bank operated a network of 63 branches overseas at end 2008.

Moreover, the diversification of business lines has transformed Blom Bankinto a universal bank, offering a wide range of services which include: retailand corporate banking, private and investment banking, brokerage, assetmanagement as well as trade finance, insurance and Islamic banking.

In this context, in 2008 Blom Bank won the “Best Bank in Lebanon” awardfrom three international specialized institutions, namely The Banker,Euromoney, and Global Finance.

Capital history and shares listing

In 1998, the Bank had 18,500,000 common shares and floated part of itscapital through an issue of Global Depositary Receipts (GDRs) on theinternational market.

In 2002, 2004 and 2005, the Bank successfully closed a capital increasethrough a preferred shares issue of 750,000, 750,000 and 1,000,000 unlistedpreferred shares respectively, further consolidating the Bank’s shareholderbase.

In February 2006, Blom Bank increased its capital by USD 276 mn throughthe sale of 3,000,000 new Global Depositary Shares (GDSs) at USD 92 pershare. The GDSs were listed on the Luxembourg and Beirut Stock Exchange(BSE). In the same year, Blom Bank listed all its preferred shares on the BSE.

In June 2008, Blom Bank listed all its shares on the BSE and redeemed allpreferred shares class 2002 (totaling 750,000 shares) to reduce the total

Company Overview

Blom Bank ranks among thetop two banks in Lebanon forall major criteria and is themost profitable bank in theindustry

“

Blom Bank providesuniversal banking services intwelve countries (includingLebanon) across Europe, theGulf and the Middle East

“

The expansion strategyadopted by the Bank hasbeen funded by severalcapital increases

“

4

4


preferred shares to 1,750,000.

Ownership structure

* Bank of New York Mellon became a shareholder of Blom Bank, as adepositary, after the bank issued Global Depositary Receipts (GDR) in 1998and, later, in March 2006.** The major shareholders of Banorabe Holding are the same as in BlomBank (with the exception of Bank of New York and AZA Holding).*** The Azhari family owns over 50%.

Figure 1: Blom Bank ownership structure as of April 2009

Bank of New YorkMellon*

Banorabe holding**

AZA Holding***

Azhari Family

Actionnaires Unis***

Shaker Holdings sal.(Shaker family)

34.37%

11.86%

9.33%

2.86%

1.83%

5.39%

5.00%

4.92%

2.81%

2.00%

19.63%2.

86%

1.83

%5.39%

5.00%

4.92%

2.81%

2.00%

19.63%

34.37%

11.86%

9.3

3%

Mrs. Nada Aoueini

Jaroudy Family

Saade Family

Khoury Family

Others

EUR

SUD

SYR

INV

INS

Leb

Source: Blom Bank

5

4

4


Corporate structure

* Under establishmentSource: Blom Bank

4 Figure 2: Blom Bank corporate structure

4

56 branches inLebanon

1 branch in Cyprus

6 branches inAmman

A Free Zone Branchin Syria

A representativeoffice in Abu Dhabi

BLOM Bank S.A.L. Head office, Beirut

99.99% BLOM BankSwitzerland

Head Office in Geneva

100%

99.88%

BLOMINVESTSaudi Arabia*Head Office in Riyadh

50%

10%

66.64%

33.33%

23.5%

BLOMINVEST Bank,Head Office in Beirut

BLOM Bank France,Head Office in Paris

- London- Dubai, Sharjah

- 6 branches in Romania

99.37% BLOM EgyptSecurities

Head Office in Cairo

99.97%

99%

BLOMDevelopment

BankHead Office in Beirut

BLOM Bank Qatar*,Head Office in Doha

BLOM Bank Egypt,Head Office in Cairo24 branches in Egypt

88.56% AROPEEGYPT for Life

InsuranceHead Office in

Cairo

AROPE EGYPT for Property InsuranceHead Office in Cairo

SYRIA ANDOVERSEAS

for financial servicesHead Office inDamascus

Arope Insurance,Head Office in Beirut9 branches in Lebanon

10%Arope Syria,Head Office inDamascus

1 branch in Aleppo

39%

52%

5%

Bank of Syria &Overseas,

Head Office in Damascus17 branches in Syria

35%34

%

80% 5%

5%

15%

60%


Business lines

Over the years, the Group has consolidated its universal banking profile,covering a large spectrum of banking services. Together with itssubsidiaries, the Bank provides all banking activities (retail, corporate,investing and private) as well as insurance, brokerage activities, assetmanagement and Islamic banking.

Commercial and corporate banking

Blom Bank provides corporate banking services both directly and through itssubsidiaries, Blom Bank France, Blom Bank Egypt and Bank of Syria andOverseas.In 2008, it was awarded the title of Best Trade Finance Bank from BankerMiddle East and World Finance.The Bank’s commercial & corporate banking and trade finance activitiesaccounted for 25.5% of operating income in 2008. The pie chart below depictsthe diversification of lending by sector at end 2008.

The Bank provides a widescope of banking servicesincluding: banking activities(retail, corporate, investingand private) as well asinsurance, brokerage, assetmanagement and Islamicbanking

“4

4 Figure 3: Breakdown of operating income 2007 and 2008

Liquidity

Corporate andcommercial bankingInvestment andprivate banking

Retail

Insurance

51.80%

25.50%

8.70%

10.90%

3.10%

51.80%

20

08

8.70%

10.90%

3.10%

25.50%

58.70%

8.90%

7.80%2.40%

22.20%

Liquidity

Corporate andcommercial bankingInvestment andprivate banking

Retail

Insurance

58.70%

22.20%

8.90%

7.80%

2.40%

20

07

Source: Blom Bank

7

4 Figure 4: Diversification of gross loans by sector at end 2008

Professionals

Agricultureand Forestry

Manufacturing

Trade retail

Trade wholesale

Services

8.7%

0.7%

10.2%

3.6%

18.6%

22.8%

10.8%

24.7%

10.2%

3.6%

18.6%

22.8%

10.8%

0.7%

Construction

Retail loans

EUR

SUD

SYR

INV

INS

Leb

8.7%

24.7%

Source: Blom Bank


Retail banking

The retail banking segment offers a wide range of products and servicesthrough a 56 -branch network covering the entire Lebanese territory as wellas a wide ATM network. Blom Bank is continuously diversifying its line ofretail banking products and services and now covers more than 135 retailproducts, classified in different segments: payment cards, reward programs,consumer loans, saving plans and e-banking. In addition to its wide coverage of the Lebanese retail banking market,Blom Bank has a network of 63 branches overseas and is actively pursuingan extensive branch expansion in the region. This is enhancing the growthof its retail business, given the significant retail banking potential in someregional countries such as Syria, Jordan and Egypt.

The pie chart below depicts retail loans distribution by product at end 2008:

In general, the Bank’s retail lending has witnessed an impressive growthover the past few years, increasing at a CAGR of 39.7% from 2002 to 2008 toreach USD 890.67 mn at end 2008, with 66,260 managed accounts.

The retail segment generated 10.9 % of operating income in 2008 andaccounted for 24.67% of the lending business although there weredisparities between the countries of operations: while retail loansaccounted for 48.16% and 41.22% of the total loans in Jordan and Egyptrespectively, the figure was only 31.95% for Lebanon and 10.89% for Syria.

Private and Investment banking

Blom Bank is active in the private and investment banking field through itsfully-owned subsidiary Blominvest Bank sal as well as its Geneva-basedaffiliate Blom Bank Switzerland, and its Saudi affiliate Blominvest SaudiArabia which was granted a license to operate in January 2008.

The private and investment banking arm of Blom Bank covers a wide scopeof services that includes: project finance, treasury and capital marketservices, advisory on mergers and acquisitions and company restructuring,as well as investment products and economic & equity research services.

The total investment banking mandates awarded to Blom Bank over thepast four years exceeded a cumulative USD 3.5 bn of which USD 3 bn werepublic mandates, with Blom Bank having lead-managed sovereign issues.

4

6%12%

41%

41%

Figure 5: Retail loans distribution by product as at end 2008

Credit cards

Housing loans

Car loans

Personal loans

6%

41%

41%

12%

EUR

SUD

SYR

INV

INS

Leb

Source: Blom Bank

The Bank’s retail business isbacked by a 56-branchnetwork in Lebanon and 63branches overseas

“

The retail segmentgenerated 10.9% ofoperating income in 2008“

The total investmentbanking mandates awardedto Blom Bank over the pastfour years exceeded acumulative USD 3.5 bn

“


Assets under management in the private banking segment have grownconsiderably over the years at a CAGR of 37.92% from 2002 to 2008, as haveprivate banking fees which grew at a CAGR of 40% between 2002 and 2008to reach USD 11.9 mn at end 2008. In total, the private and investment banking segment accounted for 8.7% ofoperating income in 2008.

Brokerage and FX trading

Through its subsidiary Blominvest, in 2008 Blom Bank covered a significantUSD 392 mn trade on the BSE out of a total USD 1,659 mn turnover,accounting for a 23.6% market share. It is worth noting that Blom Bank isalso engaged in brokerage through its affiliate Blom Egypt Securities, whichwas established in 2005. In the framework of the expansion of its brokerageactivity in the region, Blom Bank is currently establishing a securitiessubsidiary in Syria named Syria Overseas Financial Services with anestimated capital of USD 6.4 mn.

Asset management

Blom Bank entered the asset management segment in 2008, by launchingtwo funds: the Blom Cedars balanced fund and the Blom Petra balancedfund, which are both invested in fixed income as well as equities. Plans areunderway to launch more funds during 2009.

Insurance

Bancassurance products are tailored by Blom Bank’s fully owned subsidiaryArope Insurance. Since its establishment in 1974, Arope insurance has become one of themajor players in the insurance industry in Lebanon. It operates in a widerange of insurance service products that includes: life insurance, medicalinsurance, motor insurance, marine insurance and property insurance. In Lebanon, Arope insurance operates through a network that includes 13branches.

In 2006, Arope opened in Syria under the name Syria InternationalInsurance. The latter currently has three branches and three representativeoffices in the country. It is the third private insurance company to have beengranted the approval and a license to operate in the Syrian market.In April 2008, Arope received a license to establish two insurancecompanies in Egypt: Arope Egypt for Life Insurances and Arope Egypt forProperty Insurances each with issued capital of USD 9 mn.

Blom Bank’s insurance activity managed to grow its profits at a CAGR of21.5% between 2002 and 2008, to reach USD 4.8 mn at the end of 2008,which accounted for 3.1% of total operating income for the year.

Islamic banking

Blom Development Bank sal. (BDB) was established in February 2006 andstarted operations in March 2007. BDB’s business covers the entirespectrum of banking services including the acceptance of deposits and theprovision of various Islamic financing solutions in the form of Murabaha,Ijara, Tawaruk, Forward lease, Wakala and Istina’a.

Out of a total USD 1,659 mnturnover on the BSE in 2008,Blominvest’s market shareaccounted for 23.6%

“

Bancassurance products aretailored by Blom Bank’ssubsidiary: AropeInsurance. The latteroperates through a networkof 13 branches in Lebanonand opened in Syria in 2006

“


Geographical coverage

Blom Bank began its geographical expansion in the mid-1970s and today israpidly increasing its international presence. The Group is currently presentin several European and Middle Eastern countries outside Lebanon. TheEuropean countries of operation include France, England and Romania(through Blom Bank France) as well as Switzerland (through Blom BankSwitzerland). Blom Bank also operates a direct branch in Cyprus. As for itspresence in the Middle East, Blom Bank provides full banking services in thethree markets of Egypt, Syria and Jordan and has recently received licensesto operate in Qatar for commercial and private banking activities and inSaudi Arabia for investment banking activities. It is also worth noting thatBlom Bank has been present in the UAE since 1976. On a consolidated basis, at end 2008 Blom Bank managed a global activityUSD 17.9 bn (total assets at end 2008), in which overseas assets represented32.1% of the total. With total net profits of USD 251.6 mn at end 2008, thebreakdown of earnings between Lebanon and abroad revealed arespective structure of 72% to 28% in 2008 against 87% to 13% in 2005,suggesting a higher contribution of regional entities to the Group’sconsolidated earnings.

Blom Bank generates asubstantial part of itsearnings from overseasoperations, havingaggressively pursued aninternational expansion,across Europe in the mid-seventies and in the MiddleEast region and the Gulf inmore recent years

“4

4 Figure 6: Breakdown of assets 2008

Lebanon

Europe

Syria

Jordan

UAE

Egypt

68.01%

12.61%

7.88%

2.45%

2.90%

5.95%

0.15%

0.05%

2.45%2.90%

7.88%

12.61% 68.01%

0.15%0.05%

KSA

Qatar

5.95%

Source: Blom Bank

4 Figure 7: Breakdown of net income 2008

Lebanon

Europe

Syria

Jordan

UAE

Egypt

72.16%

7.45%

6.19%

2.09%

4.58%

8.30%

-0.33%

-0.44%

2.09%

4.58%

6.19%

7.45% 72.16%

-0.33%-0.44%

KSA

Qatar

8.30%

Source: Blom Bank


Syria

In 2004, Blom Bank entered the Syrian banking market through Bank ofSyria and Overseas (BSO). BSO, 39% owned by the Group, is a joint-venturebetween BLOM Bank s.a.l., the International Finance Corporation and Syrianinvestors. BSO provides full banking services, covering corporate banking, retailbanking, trade finance as well as brokerage. To date, the Bank has focusedon taking deposits, offering short-term trade financing, issuing letters ofcredit, letters of guarantee, opening documentary credits, handling ofcollections and discounting commercial papers.

At end 2007, Blom Bank had a network of 10 branches covering all majorregions in Syria. Having aggressively pursued its network expansionthroughout the country in 2008 by opening seven branches, BSO closed theyear with a total of 17 branches.

Assets at BSO, the country’s second largest privately-owned bank, rose toUSD 1,501 mn at the end of 2008, up from USD 1,326 mn at the end of 2007,a 13.2% percent increase. BSO managed to register a growth in net incomeof 196.4% in 2008 to reach a total of USD 13.9 mn by year-end. Since February 2006, Blom Bank has also been present in Syria through itsinsurance arm Arope, which opened in the country under the name SyriaInternational Insurance to provide various types of life and non-lifeinsurance services.

Blom Bank’s business in Syria accounted for 7.9% of the Group’s total assetsin 2008, and generated 6.2% of the Group’s total net income over the sameperiod.

Jordan

Blom Bank has been present in Jordan since 2004, and by end 2008 wasoperating a network of six branches. The Jordanian branch network of BlomBank mainly covers retail banking and related commercial bankingactivities, offering a wide range of products and services within thefollowing categories: banking accounts, domiciliation services,bancassurance and personal loans. Having built USD 489 mn and USD 5.27mn in total assets and total income respectively by year-end 2008, theJordanian business accounted for 2.4% of the Group’s total assets and 2.1%of the Group’s total income.

Egypt

In December 2005, Blom Bank entered the Egyptian banking sector byacquiring a small Egyptian bank with exposure to markets in both Egyptand Romania: Misr Romanian bank (“MRB”). The latter was rebranded “BlomBank Egypt”. Blom Egypt Securities was established in 2005.

Blom Bank Egypt provides full banking services including corporatebanking, trade finance, retail banking and brokerage. Going forward, theBank aims at developing private banking and insurance, bearing in mindthat in April 2008 Arope received a license to establish two insurancecompanies in Egypt, Arope Egypt for Life Insurance and Arope Egypt forProperty Insurance.

The Bank closed the year 2008 with 23 operating branches, compared toeight in mid 2006. It reported a significant growth in aggregate activity byyear-end 2008, with total assets registering a 4.8% increase to reach USD1,164 mn, up from USD 1,111 mn in 2007. Net income grew 4.92% in 2008to reach USD 20.40 mn. Blom Bank Egypt contributed 6.5% of the Group’stotal assets and generated 8.11% of the Group’s total earnings for the year.

Blom Bank entered the Syrianbanking market in 2004through Bank of Syria andOverseas. At the end of 2008,the latter operated a networkof 17 branches throughoutSyria and generated USD 13.9mn in net income for the year

“

Blom Bank has been presentin Jordan since 2004. ItsJordanian business generated2.1% of the Group’s totalincome in 2008

“

Blom Bank entered theEgyptian banking sector in2005 by acquiring MisrRomanian Bank. The Bankclosed the year 2008 with 23operating branches and a netincome of USD 20.87 mn,generating 8.11% of theGroup’s earnings for the year

“


France, England, Switzerland, Romania and Cyprus

Blom Bank has developed an extensive presence in Europe. Its subsidiaryBlom Bank France, 99.99% owned by Blom Bank sal, is headquartered inParis. In addition, it also has a branch in London and six branches inRomania.

Blom Bank operates in Switzerland through its subsidiary Blom BankSwitzerland s.a, 100% owned by Blom Bank France. Blom Bank Switzerlandis part of the private banking arm of the Group.

In the mid-1990s Blom Bank established an off-shore unit in Cyprus whereit operates through a direct branch.

At end 2008, Europe accounted for 8.63% of the Group’s total deposits. TheEuropean business of Blom Bank also accounted for 14.63% of the Group’stotal lending business. With total assets of USD 2,511 mn and total incomeof USD 18.75 mn at end 2008, the European activities contributed to 12.61%and 7.45% of the Group’s total assets and net income respectively.

UAE

Blom Bank has been present in the UAE since 1976 through Blom BankFrance. Blom has two branches in the United Arab Emirates (Dubai andSharjah) and recently established a representative office in Abu Dhabi. Itsactivities in the UAE cover corporate banking and trade finance. The UAEaccounts for 3% of the Group’s total deposits, while loans in the UAEaccount for 2.33% of the Group’s total lending business. With total assets ofUSD 577 mn and a net income of USD 11.53 mn, at end 2008 the Bank’s UAEactivity contributed 2.9% and 4.58% of the Group’s total assets and total netincome respectively.

Qatar

In April 2008, Blom Bank was granted a license to operate in the QatarFinancial Center. Blom Bank Qatar is still in its embryonic stage but targetsdeveloping corporate banking activities as well as investment and privatebanking in addition to asset management.

Saudi Arabia

In January 2008, Blominvest bank received approval to launch aninvestment bank in Saudi Arabia named Blominvest Saudi Arabia.The latterwill offer corporate finance, asset management and investment servicessuch as brokerage, wealth management, and private equity.

Other opportunities

In the framework of its regional expansion strategy, Blom Bank aims atfurther expanding its activity abroad in order to reach a more balancedactivity structure and to reinforce the global immunity of the Group. Thisstrategy consists of reinforcing its presence in markets where it is alreadyoperating as well as expanding towards new markets. Prospecting for newregional markets with high potential is now in progress, with plausibleperspectives in Algeria and Iraq.

In 2008, the Europeanactivities contributed12.61% and 7.45% of theGroup’s total assets and netincome respectively

“

Blom has two branches in theUnited Arab Emirates (Dubaiand Sharjah) and hasrecently established arepresentative office in AbuDhabi

“

Prospecting for new regionalmarkets with high potentialis now in progress, withplausible perspectives inAlgeria and Iraq

“


Domestically, Blom Bank’sprimary strategic objective isto maintain its leadingposition. The strategyrevolves around: expandingorganically, pursuing itsdevelopment towards auniversal bank andmaintaining a high level ofcost efficiency

“

Blom Bank’s target is tofurther consolidate itspresence abroad byexpanding its branch networkin its existing countries ofoperations and continuing tolook for expansionopportunities in countrieswith satisfactory risk profile

“


Strategy

On the domestic level, Blom Bank’s primary strategic objective is tomaintain its leading position. To achieve this target, the Bank’s strategyrevolves around:

Expanding through organic growth. The Bank has traditionally adoptedan organic growth strategy, abstaining from the wave of consolidationwitnessed by the Lebanese banking sector from the mid-1990s onwards.Egypt marks the exception, as the low price of the acquisition madesense for Blom Bank to pursue inorganic expansion in this market.

Continuing to pursue its development towards a universal bankingmodel by further strengthening its new business lines to be lessdependent on its traditional core business.

We also expect Blom Bank to continue its cost containment strategyand maintain a low cost-to-income ratio to preserve its performance.

On the international level, Blom Bank is looking to reach a balancedbreakdown of earnings between Lebanon and its affiliates abroad. TheBank’s target is to further consolidate its presence abroad by:

Continuing to look for expansion opportunities in countries with asatisfactory risk profile and where forecasts show profitability.

Expanding its branch network in its existing countries of operations(Syria, Jordan and Egypt).

Providing a full array of banking services in three key regional markets(Egypt, Syria and Jordan). Blom Bank targets full banking servicesthrough trade finance, commercial, retail, corporate and privatebanking.

As such, the Bank’s strategy is to become a full regional universal bankthrough the strengthening of its domestic franchise and the enhancementof cross-border activity in high value-added markets. In this regard, the year2009 will be one of consolidation for Blom Bank on both the domestic andthe international levels. The Bank will strive to continue generating strongincome from international businesses in the context of a global economicdownturn. Prospecting for new regional markets with high potential is alsounderway with plausible perspectives in Algeria and Iraq.

4

4

Ranks among the top two banks in Lebanon for all major criteria

Market leader in profitability

Successful expansion plan based on organic growth

Ample levels of liquidity as witnessed by a very low loans-to-deposits ratiothat stood at 23.1% at end 2008

Well-capitalized bank with capital adequacy ratio standing at 12.14% in FY08

Very high level of cost efficiency with Blom Bank boasting the lowestcost-to-income ratio among its peers (42.9% in 2008)

Satisfactory asset quality with low level of NPL/gross loans (at 3.9% for2008) and very high level of NPL provisioning (slightly above 100% in2008)

Strengths

4

High exposure to sovereign debt

Relatively low lending exposure as witnessed by the loans-to-depositsratio at 23.1% in FY08

High sensitivity to local political factors

Weaknesses

4

Enhancement of private and investment banking activities with thelaunch of two new entities in Qatar and Saudi Arabia

Well positioned to capture regional growth

Plausible perspectives in markets with high potential (Algeria ,Iraq)

Plans are underway to launch a private equity fund focused on Lebanesereal estate

Opportunities

4

Lower interest spreads in 2009

Persistent economic imbalances in the quasi absence of adjustmentreforms

Chronic political instability in Lebanon

Deterioration of the asset quality in light of the global economicdownturn

Impact of the global financial crisis on the Lebanese economy andbanking sector

Threats

SWOT analysis4



Latest development

Blom Bank was selected as the Best Bank in the Middle East for 2009 byBanker Middle East, in the context of a considerable surge in its earningsamidst the international financial crisis. In addition the Bank has beenselected as the Best Bank in Lebanon by Global Finance in March 2009 andWorld Finance in January 2009.

In Q1 09 Blom Bank launched the Blom Mena Banking Index that tracks allof the listed commercial banks across 11 Arab countries in the GCC andMENA.

With regard to H1 09 results, non-interest income retreated, displaying a8.9% y-o-y decrease as a result of the sluggish market conditions resultingin diminished commission income. As for the net interest income, it grew by7.6% y-o-y despite pressures on interest spreads. Net profit of USD 138.3 mnwas declared for the first half of the year, indicating a 5.8% y-o-y increase inthe bottom line results. This was driven by a 7.3% growth in total operatingincome and 15.1% increase in operating expenses (personal charges andother operating expenses), leading to a 4.4% rise in profit before taxes.

Blom Bank witnessed a 8.5% growth in its balance sheet in H1 09. Loans andadvances grew by 3.6% during the first half of the year attaining USD 3,598mn, reflecting a prudent lending activity during the period. On the otherhand, total deposits expanded by 10.5% over the same period to reach USD16,691 mn by the end of H1 09. This implies a loans-to-deposits ratio of21.6% in H1 09, down from 23.1% in H2 08. The Bank’s cash positionimproved during the first half of 2009, as reflected by a 6.5% increase.

4

Net interest incomeNet fees & commissions incomeTrading and investment incomeNon-interest incomeOther operating incomeOperating incomeOperating expensesDepreciation and amortizationCredit loss expenseProfit before taxesIncome tax expenseNet profit/loss from sale or disposal of other assetsNet profit

Table 1: Blom Bank’s H1 09 summary income statement

USD million H1 08 H1 09 y-o-y%

187.235.723.559.212.7

259.2-96.5-7.81.6

156.5-26.30.6

130.7

201.632.521.454.022.5

278.1-111.1-10.97.3

163.4-25.50.4

138.3

7.6%-8.9%-8.9%-8.9%76.8%7.3%15.1%39.7%359.3%4.4%-3.2%-30.5%5.8%

Cash & Balances with BDLFinancial assetsDue from banksLoans & advances Other assetsTotal assetsDue to banks and other financial institutionsDeposits Other liabilitiesShareholders’ equityTotal liabilities and shareholders' equity

Table 2: Blom Bank’s H1 09 summary balance sheet

USD million H2 08 H1 09 Ytd %

2,3757,6403,8613,474550

17,900794

15,109538

1,45917,900

2,5288,8563,8853,598554

19,421620

16,691596

1,51319,421

6.5%15.9%0.6%3.6%0.8%8.5%-21.9%10.5%10.7%3.7%8.5%

Source: Blom Bank

Source: Blom Bank

Balance sheet analysis

Customer Deposits

Customer deposits contributed 82.2% and 83.9% respectively of funding inFY07 and FY08, indicating a clear reliance on customer deposits as a sourceof financing. We expect Blom Bank’s share of deposits to total assets to be in the rangeof 82.5%-84% over the projection period.

Year-on-year (y-o-y) growth in customer deposits reached 17% in 2007,despite the political instability that prevailed in the country. This growthdecelerated in 2008 to 9.85%, moving the customer deposits base fromUSD 13,669 mn at end 2007 to USD15,016 mn at end 2008. (USD 13,737 mnat end 2007 and USD 15,109 mn at end 2008 including deposits fromrelated parties). H1 09 results show that deposits (including deposits fromrelated parties) expanded by 10.5% during the first half of 2009 to reachUSD 16,691 mn.

Given the Bank’s reliance on customer deposits for funding, their pace ofgrowth in the coming years will be a major driver in balance sheet growth.

Based on Blom Bank’s commitment to further expand its franchise in theregion and on the fact that interest rates in Lebanon are consideredattractive compared to other countries, we anticipate customer deposits toregister a 17% y-o-y growth in 2009e. We believe this growth will betriggered by an improvement in Lebanon’s overall economic situation inlight of a renewed confidence in the economy as a whole during the firsthalf of 2009.As a result of an anticipated upturn in international interest rates aspressure on Libor eases, this pace of growth is expected to graduallydecelerate over the forecast period and reach 9% in 2013e. More generally, we expect customer deposits to grow at a 12% CAGR overthe projection period to reach USD 26,425 mn in 2013e, compared to aCAGR of 15.96% for the 2002-2008 period.

At the end of 2008, 28.8% of the deposit base was derived from overseasoperations, with Syria, Egypt and Europe accounting for the bulk ofdeposits from international operations (9%, 6% and 9% respectively).

Financialhighlights and

Forecasts

Customer depositscontribute to 84% of theBank’s funding. We areprojecting a 12% CAGR forcustomer depositscompared to a CAGR of15.96% for the 2002-2008period

“

4

4

USD mn

Figure 8: Customer deposits and growth rates

Customer deposits (lhs)

% Growth (rhs)0

5.000

10.000

15.000

20.000

25.000

30.000

2013e

2012e

2011e

2010e

2009e

2008

2007

5%

0%

10%

15%

20%

Source: FFA Private Bank


Looking ahead, we expect international operations to increasinglycontribute to the Group’s deposits as Blom Bank’s target is to continueexpanding its branch network in its existing countries of operations (Syria,Jordan and Egypt) while looking for expansion opportunities.

Other funding sources

Interbank liabilitiesDue to banks and financial institutions declined from USD 1,032 mn in2007 to USD 794 mn in 2008. Consequently, interbank liabilities to totalfunding decreased from 6.20% in 2007 to 4.44% in 2008. In 2009e, weexpect interbank liabilities to decline moving from USD 794 mn in 2008to USD 703 by end of year 2009e. The figure is expected to witness astrong growth afterwards and to grow at a CAGR of 19.9% between2010e and 2013e, thus moving to USD 1,453 by the end of theprojection period.

Shareholders’ equityBlom Bank demonstrated a robust capital level in 2008 with a Basel IIcapital adequacy ratio of 12.14%. This places it comfortably above therequired ratio of 8%. The Bank’s equity to assets ratio dropped from 8%in FY07 to 7.7% in FY08. The slight y-o-y decline witnessed in the equityto assets ratio when compared to 2007 was due to the redemption ofall preferred shares class 2002 (totaling 750,000 shares) in June 2008.Shareholders’ equity grew by 3.68% in FY08 rising from USD 1,330 mnin FY07 to USD 1,379 mn.

Going forward, we expect Blom Bank to remain soundly capitalizedalthough no capital increase is expected in the near future. We anticipateBlom Bank to demonstrate adequate capital levels, with the equity toassets ratio gradually increasing to reach 8.3% in 2013e and a Basel IIcapital adequacy ratio remaining close to 12% over the projection period.

Lending

Loans and advancesThe lending allocation indicates that the retail segment accounts for asubstantial part of the lending business (25.3% of the total loan book inFY08). The figures for loans allocated to corporate clients at end 2008highlights that Blom Bank has a significant exposure to the servicessector, with around 22.82% of the loans outstanding being allocated tothis segment.

Blom Bank boasts a sound

capitalization level, with a

Basel II CAR at 12.14% in

2008

“


4 Figure 9: Customer deposits breakdown by country of operation

Lebanon

Egypt

Syria

Jordan

UAE

Europe

71%

6%

9%

2%

3%

9%

6%

9%

2%3%

71%

9%

Source: Blom Bank

In contrast to the sluggish lending activity that prevailed before 2007,loans growth accelerated considerably in 2007 and 2008, as reflectedby a 25.3% growth in FY08. During the first half of 2009, loans grew by3.6%, attaining USD 3,598 mn by the end of June 2009. Looking ahead, we have adopted a conservative approach as ourexpectations are based on sustained but slower growth figurescompared to the past two years. We expect the lending business to pickup in the 2nd half of 2009 resulting in a growth rate of 13.93% for theyear. We anticipate the loans growth to be sustained throughout theforecast period as reflected by a CAGR standing at 13.29%. We expectthis growth pattern in the lending portfolio to be mainly driven by asurge in demand from the private sector coupled with an increasingcontribution of regional entities to the Group’s lending portfolio.

We note that Blom Bank’s loans-to-deposits ratio of 23.1% for 2008 wassignificantly below its peers, namely Bank Audi (34.9%) and Byblos Bank(34%). We anticipate Blom Bank’s loans-to-deposits ratio will increasegradually to 24.5% by the end of the projection period and that its liquiditylevels will remain ample.

Asset qualityDespite high lending growth in 2008, Blom Bank’s asset quality hasremained reasonably sound, ending the year with a gross NPL ratio of3.9% (versus 7.9% in 2007). Coverage ratio at the end of the year rose to101.9% versus 95.6% in 2007.

We expect the NPL ratio to increase gradually from 3.9% in FY08 to4.7 % in 2013e to reflect a possible slight deterioration in the quality ofincremental loans and potential pressure on the economic

In FY08, Blom Bankwitnessed a strong growthin its loan portfolio (25.3%)“

We expect loans to grow ata 13.29% over theprojection period “

4

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

USD mn

Figure 11: Loans- to-deposits ratio

0

10%

5%

0%

15%

20%

30%

25%

2013e

2012e

2011e

2010e

2009e

2008

2007

Customer deposits (lhs)

Loans-to-deposits ratio (rhs)

Total loans (lhs)


4

USD mn

Figure 10: Total loans and growth rates

Total loans (lhs)

% Growths (rhs)0

2000

4000

6000

8000

2013e

2012e

2011e

2010e

2009e

2008

2007

5%

0%

10%

15%

20%

30%

25%


Blom Bank’s asset quality is

high as reflected by its gross

NPL ratio of 3.9% in 2008.

Going forward, we have taken a

conservative approach on asset

quality, as we expect the NPL

ratio to gradually increase,

reaching 4.7% in 2013e

“


environment. With regard to the coverage ratio, we have assumed thatit will stay close to 99% over the forecast period, reflecting the Bank’sstrict operational and credit risk management policies.

Sovereign exposure

With significant exposure to the sovereign (49.9% of total assets in 2008),Blom Bank’s current asset allocation is typical of a Lebanese bank.

As seen in the graph below, we anticipate Blom Bank to slightly decrease itsexposure to the sovereign to 46.8% by the end of the forecast period, inview of a better diversification of earning assets.

Blom Bank’s exposure to the

sovereign is expected to

gradually decrease, moving

from 49.9% in FY08 to 46.8%

by the end of the projection

period

“


Figure 12: NPLs and provisioning

NPL / Gross Loans (lhs)

LLP / NPL (rhs)0%

2%

4%

6%

8%

10%

2013e

2012e

2011e

2010e

2009e

2008

2007

94%

92%

96%

98%

102%

100%


4 Figure 13: Sovereign exposure

Sovereign exposure 42%

44%

46%

48%

50%

52%

2013e

2012e

2011e

2010e

2009e

2008

2007

46.82%

47.61%

48.48%

49.27%

49.95%

49.87%

44.67%


4

Income statement analysis

Revenues

Revenue mixIn line with Blom Bank’s strategy to pursue its development towards auniversal bank by further strengthening its new business lines to be lessdependent on its traditional core business, Blom Bank has considerablydiversified its revenue mix in the last five years with non-interestincome contributing 26.8% of operating income during FY08. Weexpect non-interest income as a percentage of operating income togradually decrease to 23% by the end of projection period as we expectthe Bank’s interest income to grow at a faster pace pace resulting fromdecreasing pressure on spreads and a substantial growth in deposits.

Net interest incomeNet interest margins and spreads will be under pressure in 2009e as aresult of the sharp decline in Libor since the end of 2008. We anticipateBlom Bank’s net interest margin and net interest spread to stand at2.24% and 1.92% respectively in 2009e, compared to 2.46% and 2.12%in 2008 respectively. Going forward, net interest spread is expected towiden, as a result of easing pressures on Libor. Thus, we expect theinterest rate spread to gradually increase from 1.92% in 2009e to 2.22%in 2013e.

In FY 08, net interest income grew by 37.4% to USD 410 mn comparedto USD 299 mn in FY07. In 2009e, we expect Blom Bank’s net interestincome growth to decelerate to 1.7% reflecting the current marketconditions, specifically on the foreign currency spreads which areexpected to remain under pressure during the year. Looking ahead, weanticipate net interest income to witness faster growth as a result ofhigher spreads and deposit base expansion. Net interest incomegrowth is expected to be in the range of 14%-17.5% between 2010e

As a result of the Bank’sstrategy to pursue itsdevelopment towards auniversal bank, non-interest income accountsfor a substantial part of thetotal operating income(26.8% in FY08)

“

We expect the net interestspread to be underpressure in 2009e and towiden afterwards as theLibor regains momentum

“

4

USD mn

Figure 14: Revenue mix

Net interest income/Operatingincome

Non-interest income/Operatingincome 0%

40%

20%

60%

80%

100%

120%

2013e

2012e

2011e

2010e

2009e

2008

2007

73.7%

26.3%

73.2%

26.8%

72.2%

27.8%

73.5%

26.5%

74.8%

25.2%

76.2%

23.8%

77%

23%


4

4

1.0%1.2%1.4%1.6%1.8%2.0%2.2%2.5%2.7%

2012e

2013e

2011e

2010e

2009e

2008

Figure 15: Net interest margin vs. Net interest spread

Net interest spread

Net interest margin

Net interest income growthis expected to decelerate to1.7% in 2009e and tosignificantly accelerateover the remainder of theprojection period

“Source: FFA Private Bank


and 2013e, which would move the net interest income from USD 417mn by year-end 2009e to USD 756 mn by the end of 2013e.

Non-interest income In FY08, non-interest income grew by 40.7% to USD 150 mn comparedto USD 107 mn in FY07. As a result of a decline in net fees andcommissions income, H1 09 results demonstrated a 8.9% decrease (y-o-y) in non-interest income, mirroring the fact that the latter was affectedby the sluggish market conditions. Looking ahead, we anticipate non-interest income to witness slower growth compared to 2008, asreflected by a CAGR of 8.5% over the projection period, reaching USD234 mn in 2013e; with 6.9% growth expected for 2009e.

Net fees and commissions income has been the largest component ofnon-interest income and contributed 49.4% of it in FY08. In the courseof 2008, this segment of revenue grew considerably, as witnessed by a24.9% y-o-y growth, to reach USD 74 mn by year end. Going forward,we expect net fees and commissions income to continue to be a majorcontributor to non-interest income and to grow at a CAGR of 6.3% overthe projection period, reaching USD 100 mn by 2013e.

Fee income is recurrent through LCs, retail activities, private bankingand asset management. Thus, corporate & commercial banking andinvestment & private banking remain the key drivers of Blom Bank’s feeincome, contributing 49.8% and 35.2% (respectively) of it in FY08.

Going forward, we believe fee income growth will be triggered by theBank’s foreign operations, asset management division and the twoinsurance companies that were recently established in Egypt.

We anticipate non-interest

income to grow at a CAGR of

8.5% over the forecast period

and to remain mainly driven

by net fees and commissions

income

“


4

USD mn

Figure 16: Non-interest income vs. interest income

Interest income

Non-interest income0

1.000

1.200

800

600

400

200

2013e

2012e

2011e

2010e

2009e

2008

2007

299

410

417

481

564

663

756

107

150

160 174 190 207 225


4 Figure 17: Fee income breakdown by business segment in 2008

Insurance

Investment andPrivate Banking

Retail

Corporate andCommercial Banking

5.7%

35.2%

9.3%

49.8%

9.3%

35.2%49.8%

5.7%

Source: Blom Bank

Operating expenses and cost efficiency

Operating expensesIn FY08, a 41.2% increase in operating expenses (staff and generalexpenses + other operating expenses) was registered, largelyattributed to a USD 29.9 mn addition to staff expenses. Blom Bank’s H1 09 results demonstrated that operating expensesincreased by 15.1% on a year-on-year basis. Looking ahead, we expect operating expenses to grow at a CAGR of10.26% over the forecast period, which reflects the strict costcontainment strategy to preserve a high level of profitability.

Cost efficiencyAs a result of the Bank’s organic and gradual growth coupled with astrict cost containment strategy, Blom Bank boasts a high level of cost-efficiency as witnessed by its cost-to-income ratio which is one of thelowest in the Lebanese banking industry. Blom Bank’s cost-to-incomeratio stood at 42.9% in FY08, significantly below the sector average.

Looking ahead, Blom Bank’s cost-to-income ratio is expected to slightlyincrease in 2009e, as costs will considerably rise on the back of anaggressive regional strategy revolving around the launch of the Saudiand Qatari entities and the deployment of additional branches inexisting countries of operations. Starting 2010e, the Bank’s cost-to-income ratio is expected to gradually decrease moving from 43.64% in2009e to 40.85% in 2013e. This decreasing trend translating into highercost-efficiency levels can be mainly attributed to the fact that growth inrevenues will surpass growth in costs, thus leading to a contained cost-to-income ratio. In fact, we have anticipated total income to grow aCAGR of 11.9% over the forecast period in parallel with a 10.7% averagegrowth in costs.

Returns

Net profit growth, forecasts and driversIn 2008, the Bank continued to deliver a strong performance, reportinga net profit of USD 252 mn. This represented an increase of 22.9% overthe previous year and maintained the Bank’s leading position in termsof net profit among its peers. Blom Bank’s H1 09 results demonstrateda reasonable performance with net profit rising 5.8% (y-o-y) to USD138.3 mn.

We expect operatingexpenses to grow at aCAGR of 10.26% over theforecast period

“

Blom Bank boasts a veryhigh level of cost-efficiencyas witnessed by its cost-to-income ratio which is oneof the lowest in theindustry

“

Blom Bank’s cost-to-income ratio is expected toslightly increase in 2009eand to gradually decreasestarting 2010e to reach40.85% by the end of theforecast period

“

Blom Bank reported a22.9% growth in its netprofit in FY08 reaching USD252 mn by the end of theyear

“

4

0

200

400

600

800

1000

1200

USD mn

Figure 18: Cost-to-income ratio

44.0%43.5%43.0%42.5%42.0%41.5%41.0%40.5%40.0%39.5%39.0%

2013e

2012e

2011e

2010e

2009e

2008

2007

Total income (lhs)

Cost-to-income ratio (rhs)

Total costs (lhs)

Source: Blom Bank


The bottom line figure is expected to grow at a slower pace comparedto 2008 as reflected by a CAGR of 13.5% over the projection period.However, we believe this figure reflects a solid growth pattern whichwould mainly be driven by a decent loan book expansion coupled witha higher contribution of regional entities to the Group’s net incomefurther supported by a high level of cost efficiency.

ROAE and ROAABlom Bank boasted ROAA and ROAE of 1.40% and 17.9% respectively in2008. The returns ratios are expected to gradually increase to reach1.51% and 18.5% respectively in 2013e on the back of higher netprofits.

We expect net profit to growat a 13.5% CAGR over theforecast period“


4

USD mn

Figure 19: Net income and growth rates

Net profit (lhs)

% growth (rhs)0

100

200

300

400

500

0%

5%

10%

15%

20%

25%

2013e

2012e

2011e

2010e

2009e

2008

2007


4 Figure 20: ROAE and ROAA

ROAE (lhs)

ROAA (rhs)

20.0%18.0%16.0%

12.0%

8.0%

4.0%

0.0%

14.0%

10.0%

6.0%

2.0%

1.60%1.40%1.20%1.00%

0.80%0.60%0.40%0.20%0.00%

2013e

2012e

2011e

2010e

2009e

2008

2007


Valuation methodology

Our approach to providing a fair value estimate for Blom Bank is based on aDiscounted Equity Cash Flow (DECF) methodology.

Equity cash flows are calculated by subtracting preferred share dividendsfrom net income to derive the attributable earnings to commonshareholders, and the retention required to maintain a capital adequacyratio 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 periodwhere ROE converges to the discount rate. Additionally, the terminal valuewas calculated using a perpetual growth rate of 3%.

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 risk-free 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 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% - 5.50%)

Assuming an equity risk premium of 7.5% and a Beta of 1, the weighteddiscount rate on the Bank’s Lebanese operations is 16.62%.

Foreign operations

We have estimated the discount rate of the European, GCC (Qatar, UAE andKSA), Syrian, Jordanian and Egyptian operations by adding the country riskpremium to the US risk-free rate and the 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

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

“



and 30-year US treasury bonds resulting in a rate of 4.1% The country risk premium was derived by conversion of the country rating,equivalent to the following:

Table 3: Country risk premiums

The resulting discount rates are 12.35% for Europe, 19.10% for Syria, 15.60%for Jordan, 12.45% for the GCC and 14.85% for Egypt, using the same equityrisk premium.

By weighting the discount rate of each geographical location in relation toits contribution to operations of the Bank, we reach a weighted discountrate of 16.06%.

Fair value estimate and recommendation

Based on our projections, our fair value estimate derived from discounteddividends attributable to common shareholders and excess capitalamounts to USD 91.6 per share, implying a P/B 09 of 1.41 and a P/E 09 of7.40.

Accordingly, we assign a Buy Recommendation to Blom Bank

It is worth noting that an improvement in the country risks associated withthe operations of Blom Bank and further geographical diversification to lessrisky 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

Our fair value estimateamounts to USD 91.6 pershare, implying a P/B 09 of1.41 and a P/E 09 of 7.40

“

Country risk premium

Europe 0.75%

Syria 7.50%

Jordan 4.00%

GCC 0.85%

Egypt 3.25%


4

Discount rate 18.06% 16.06% 14.06%

Fair value per share USD 78.3 USD 91.6 USD 110.8

Financial Statements

2013e2012e2011e2010e2009e20082007In USD mn

4,22722159

4,0779,068708

6,0916,474

4468204261

31,762

26,4251,45319820462382141

2,635

31,762

3,85920145

3,8378,295649

5,5285,818

3400194239

28,989

24,2431,27318219459371123

2,309

28,989

3,45818131

3,4797,451585

4,9365,133

3342185220

25,941

21,8411,00516418555562107

2,023

25,941

3,10414118

3,2136,693527

4,3884,526

3292176202

23,255

19,6778261481765045493

1,778

23,255

2,75011105

2,9395,958470

3,9183,953

2250168185

20,710

17,5687031321684384784

1,570

20,710

2,375954

3,1124,044421

3,8613,470

4215134201

17,900

15,016794931343832180

1,379

17,900

2,3576942

3,9032,050

04,9572,768

4172163153

16,639

13,6691,032681633081158

1,330

16,639

- Cash & Balances with BDL- 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- Deposits to related parties- Engagement by acceptance- Other liabilities- Provisions- Minority interest- Total shareholders' equity

• Total liabilities and equity

Balance Sheet 4

2013e2012e2011e2010e2009e20082007

1,933(1,178)

756

1005966

225

(209)(37)(11)(155)

-

569(95)475(17)

1,715(1,052)

663

935460

207

(185)(31)(15)(141)

-

498(83)415(15)

1,493(929)

564

865055

190

(161)(26)(13)(128)

-

427(71)356(13)

1,284(803)

481

784650

174

(139)(22)(8)

(116)-

369(62)307(11)

1,121(704)

417

714247

160

(123)(20)5

(109)-

330(54)276(10)

1,082(672)

410

743145

150

(116)(18)(19)(108)

3

304(52)252(9)

985(686)

299

593116

107

(86)(12)8

(72)-

243(38)205(3)

- 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- Net profit from sale of other assets

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

Income Statement4

In USD mn


27

2013e2012e2011e2010e2009e2008Growth

14.1%9.6%11.3%9.0%9.5%9.3%14.4%

2,6358.3%

18.5%1.51%6.60%4.38%2.22%2.58%

40.85%

21.5021.26

14.42%3.73

114.380.696.5048.21%

14.2%11.8%13.4%11.0%11.7%11.7%16.4%

2,3098.0%

18.4%1.45%6.47%4.32%2.15%2.50%

41.02%

21.5018.58

16.43%4.2699.250.805.5867.05%

13.8%11.5%13.4%11.0%11.5%11.4%15.9%

2,0237.8%

18.1%1.40%6.29%4.25%2.03%2.38%

41.65%

21.5015.96

15.90%4.9785.930.924.8206.08%

13.2%12.3%14.5%12.0%12.3%12.2%11.3%

1,7787.6%

17.7%1.35%6.05%4.11%1.94%2.27%

42.42%

21.5013.77

11.24%5.7674.521.064.3335.47%

13.9%15.7%13.9%17.0%16.0%15.7%9.8%

1,5707.6%

18.1%1.38%6.02%4.10%1.92%2.24%

43.64%

21.5012.389.85%6.4064.861.223.6474.60%

3.7%7.6%25.3%9.8%7.4%7.7%

22.90%

1,3797.70%

17.9%1.40%6.50%4.38%2.12%2.46%

42.98%

21.5011.27

20.38%7.0355.961.423.6474.60%

- 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)- EPS- EPS growth (%)- P/E (x)- BVPS- P/BV (x)- DPS- Dividend yield (%)

KPIs and Key ratios 4

2013e2012e2011e2010e2009e2008Capital

2013e2012e2011e2010e2009e2008Earnings and Margins

2013e2012e2011e2010e2009e2008Efficiency

2013e2012e2011e2010e2009e2008Share data


BLOM BANK - FFA · 52 – Wk range USD 57.5 - 106.2 Sh arep ic nf om t * Blom Bank shares...

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Transcript of BLOM BANK - FFA · 52 – Wk range USD 57.5 - 106.2 Sh arep ic nf om t * Blom Bank shares...