Significant uncertainties notwithstanding, recent plans announced for Bank Audi – a capital increase and negotiations to sell its business in Egypt – should, if successful, put the Lebanese bank in a better position to navigate the challenges faced. The plans should be seen as good news for Odea Bank, in which Bank Audi maintains a majority stake.
We are keeping our Hold recommendation on the ODEABK 2027 bond, although we acknowledge that news from Bank Audi may be the calm before what could be a storm as early as next week.
Decision regarding March 2020 sovereign eurobond repayment expected very soon
Lebanon has formed a new government. According to the finance minister, this new government will make a decision regarding the US$1.2bn eurobond maturing on 9 March next week. That bond is indicated in the low 80s. What the authorities decide regarding that bond is likely to have implications for Lebanon's banks, which are known to be significant holders of the government's securities.
Bank bonds already appear to assume there will be burden-sharing
Earlier this month, reports stated that Lebanon could be rethinking plans to restructure sovereign bonds held by its banks, given the potential rating implications of such actions. Those reports came after other commentary suggested that the authorities were considering extending the maturities of bonds held by local lenders, while repaying foreign holders of these bonds. About 30% of sovereign eurobonds are held by foreigners, according to Reuters. Given the sovereign's debt burden, it is not clear that plans to restructure sovereign bonds held by the banks will be permanently shelved – authorities may just seek ways around the rating (and other) implications of this. Focusing on the Lebanese banks' bonds, the concern is that if the banks are asked to extend the maturities on sovereign bonds, any NPV losses incurred may be shared with bank bondholders.
As stated in our 2020 outlook report, indicative prices on the Lebanese banks' bonds already appear to assume there will be burden sharing in some form. In addition, we note that the Lebanese banks’ ratings at some agencies have already been cut to ‘selective’ or ‘restricted’ default as lenders were ordered to pay only half of the interest on FC-denominated deposits in foreign currency. The other half was to be paid in LBP. Thus, the ratings discussion does not apply to banks in the same way as it may do to the sovereign.
Two Lebanese banks have announced capital-raising plans
Bank Audi has disclosed that it is now accepting USD-denominated contributions to capital from existing shareholders, and the majority of its owners have "already indicated their willingness to contribute". Blom Bank previously disclosed that terms of a 10% increase in Common Equity Tier 1 had been approved at an extraordinary general assembly. News regarding capital at Bank Audi and Blom Bank comes after Banque du Liban asked lenders to boost equity by 10% by end-19 and by another 10% by June 2020. Late last year, comments from management at Blom Bank suggested it would be difficult to do this. However, it seems two of Lebanon’s largest lenders are at least attempting to raise capital. Boosts to capital would clearly be positive for Lebanese bank bonds.
However, uncertainties regarding the banks’ sovereign bond holdings and general fundamentals (we still do not have Q3 19 figures for Lebanese lenders) will likely continue to drive bank bond valuations.
Bank Audi plans to sell its subsidiary in Egypt
Following media speculation, Bank Audi confirmed that it is "conducting exclusive negotiations" with First Abu Dhabi Bank (FAB), to sell its subsidiary in Egypt, Bank Audi sae. The talks are at an early stage and FAB has cautioned that there is no certainty that a deal will take place. Egypt accounted for just over 9% of total assets and almost 14% of loans at Bank Audi at end-June 2019. The Egypt business also contributed more than 16% to the group's H1 19 net result. Entities outside Lebanon together accounted for almost 31% of total assets at end-June 2019, and 30% of H1 19 net profit.
This announcement, and the fact that FAB currently has no significant presence in Turkey (unlike Emirates NBD), may lead to speculation regarding Bank Audi's intentions for Odea Bank. If Bank Audi was to sell its c76% stake in Odea Bank to double-A rated FAB, it would clearly be positive for the ODEABK bond. However, we note that Bank Audi has stated that it has "no current intention to engage in negotiations to sell any other subsidiary abroad". Nonetheless, we do think the actions that Bank Audi has announced, ahead of what might be another eventful week in Lebanon, should be seen as good news for its Turkish subsidiary.
For more on Odea Bank's latest results, see our Q3 2019 comment.
Key figures: Bank Audi and Odea Bank
| H1 2019 (USD mns / %) | Bank Audi | Odea Bank |
|---|---|---|
| Issuer ratings (Mdys/S&P/Fitch) | Caa3↓/SD/RD | B3(neg)/NR/B(neg) |
| Bond ratings (Mdys/S&P/Fitch) | NR/NR/NR | Caa3(neg)/NR/B-(neg) |
| Cash and central bank balances | 18,741.2 | 636.7 |
| Loans (net) | 12,115.0 | 3,472.3 |
| Total assets | 47,507.0 | 5,286.2 |
| Deposits | 31,791.0 | 3,459.0 |
| Equity | 3,810.0 | 546.4 |
| Operating revenue | 688.0 | 117.7 |
| Operating expenses | 306.0 | 68.6 |
| Pre-tax profit | 311.0 | 2.3 |
| Net income | 250.0 | 1.8 |
| Return on equity | 14.3% | 0.6% |
| Return on assets | 1.1% | 0.1% |
| Cost/income ratio | 44.5% | 58.3% |
| Loans/deposits ratio | 38.1% | 100.4% |
| Deposits/liabilities | 72.8% | 73.0% |
| Equity/assets ratio | 8.0% | 10.3% |
| Tier 1 ratio | 11.9% | 12.9% |
| Total capital ratio | 19.3% | 20.1% |
| Impaired loans ratio | 7.1% | 9.4% |
| Reserves/impaired loans | 64.6% | 102.8% |
ODEABK 2027 and BANAUD 2023: Mid YTM (%)
Source: Bloomberg. BANAUD 2023 was a self-led deal, and is relatively illiquid.
ODEABK 2027 and BANAUD 2023: Mid prices
Source: Bloomberg. BANAUD 2023 was a self-led deal, and is relatively illiquid.