Lebanon-based bank enters new markets

Bank Audi has performed consistently well in recent years, even during the global financial crisis


Bank Audi sal- Audi Saradar Group (Bank Audi) is a private joint stock company operating in Lebanon, Europe and the Middle East and North Africa (MENA) region. It provides a full range of products and services, including commercial and corporate banking, retail banking, private banking, investment banking and insurance activities.

Bank Audi has a long heritage, tracing its roots back to 1830. It was incorporated in its current form as a privately-held Lebanese company in 1962. At the time of its incorporation the shareholders base comprised members of the Audi family in addition to Kuwait-based family investors, the Sabbah and the Homaizi families. It has expanded gradually since then and now comprises more than 1,500 shareholders.

The bank grew steadily since the early 1990s, until becoming the largest Lebanese bank. Most recently, over the past seven years, Bank Audi embarked upon a geographical expansion strategy, and now ranks among the top 20 Arab banking institutions in terms of regional coverage, with operations in 11 countries. In total, it has a network of 157 branches, principally in the MENA region. It is also now a public company, listed on both the Beirut and the London Stock Exchanges. Bank Audi has more than half a million customers and holds more than 850,000 accounts. It has approximately 4,600 employees across all its entities.

Corporate governance and internal control
Over the past 10 years Bank Audi’s diversification, growth, and regional expansion have been accompanied by the development of a rigorous set of internal control systems and processes. As a result, today Bank Audi has a robust governance system and internal control framework.

The importance of sound governance systems is now widely recognised, not only within the banking community but also among regulators, investors and other key bodies such as rating agencies, researchers and insurance companies. Furthermore, depositors and other customers are becoming increasingly aware of its importance. Corporate governance, together with a strong internal control framework, has become a key feature of the bank’s value proposition in today’s highly competitive market.

Bank Audi’s board of directors consists of 12 members, elected by the general assembly of shareholders for a term of three years. Four of these are independent non-executive members. The overall responsibility of the board is to provide strategic direction, management supervision and control. At its heart is the ultimate goal of increasing the bank’s long-term value.

Governance structure
In addition to the board of directors, the bank has several board committees:
i) Audit Committee
The role of this committee is assisting the board in assessing the adequacy of accounting and financial reporting policies, internal control and the compliance system. It also has a duty to verify the integrity of all financial statements and the reliability of public disclosures. Other responsibilities include the appointment, remuneration, qualifications, independence, and effectiveness of external auditors and the independence and effectiveness of the internal auditors.
ii) Corporate Governance and Remuneration Committee
This committee’s responsibility is assisting the board in maintaining an effective institutional governance framework for the group, an optimal board composition, effective board process and structure, and a set of values and incentives for executives and employees that are focused on performance and promote integrity, fairness, loyalty and meritocracy.
iii) Board Group Risk Committee
The role of this committee is assisting the board in providing an oversight of the senior management’s activities in managing risk – in terms of credit, market, liquidity, operational, compliance, reputational and other risks – in line with the recommendations of the Basel Committee for enhancing corporate governance.
iv) Group Executive Committee
This committee’s role is developing and implementing business policies and to issue guidance for the group within the strategy as approved by the board. It also supports the Group CEO in the day-to-day running of the bank.
v) Disclosure Committee
This committee’s remit is ensuring information that may be subject to certain laws and regulations, or which is required by relevant listing authorities, or whose discolsure might contribute to investors confidence, is recorded, processed, summarised and reported in a clear, fair and accurate format, within specified time periods.

Further, and in line with appropriate good governance practice, the bank has also created a number of standing management committees, notably to handle credit, assets and liabilities management, business development, anti-money laundering, and IT among others.

Policies of the governance structure
In 2006 the board adopted a set of corporate governance guidelines, which has led to the gradual adoption of a number of policies, charters, and terms of reference that shape the bank’s governance framework. Such documents cover most areas of the board’s functions and are continuously revised and enhanced. They cover a wide range of issues, including risk supervision, compliance, audit, remuneration, evaluation, succession planning, ethics and conduct, budgeting, and capital management.

In addition, clear lines of responsibility and accountability have been established throughout the organisation with a continuous chain of supervision for the group as a whole, including effective channels of communication of the Executive Committee’s guidance and core group strategy. Strategic objectives to guide corporate values and promote high standards of conduct have been established and widely communicated throughout the group, providing appropriate incentives to ensure professional behaviour.

The objectives of corporate governance
Good corporate governance has been proven to create long-term value and is a key contributing factor to the success of the bank as a whole. Bank Audi’s high-level corporate governance objectives are to:
– Enhance transparency, efficiency and consistency in the decision making process
– Ensure appropriate objective and unbiased risk monitoring and adequacy of internal control and reporting
– Ensure a high level of protection of the bank’s assets and business from any abuse or oversight;
– Enhance the responsibility and accountability of officers and the board towards the shareholders and ensure acceptable executive and employee compensation
– Enable the adoption of a reasoned strategy and the development and implementation of successful business policies
– Plan and ensure succession and corporate perpetuation

Challenges to corporate governance
International best practice is constantly evolving. Historical corporate failures regularly revealed limitations in what were once believed to be sound practices. These limitations occurred in the areas of risk management supervision, audit supervision and financial reporting. In some instances, inappropriate qualifications and insufficient engagement of independent board members were also identified as key elements leading to these failures.

As a result, banks need to constantly review and enhance their governance practices. New regulations and recommendations, that are increasingly complex and demanding, are also constantly being issued by the regulators and government bodies. In order to follow these, banks need to dedicate time and effort adapting to these changes.

Board membership, in particular, is becoming increasingly demanding. The time and effort that should be allocated by board members – including independent and non-executive members – has reached unprecedented levels. Board agendas are expanding in scope and complexity, giving rise to the need for specialised directors and committees. Comprehensive and rigorous processes are also needed to enable the decision-making bodies to discharge their responsibilities efficiently.

The difference
Bank Audi pioneered the introduction of governance reform in the MENA region in 2006 when, with the assistance of the International Finance Corporation and Nestor Advisors (a leading London based governance consultancy firm) it embarked on an 18-month long enhancement programme. Today, the board is satisfied that the bank’s governance structure is adapted to its needs and meets the high expectations of depositors, regulators, investors and the markets in general.

Since then a large number of banks in the MENA region have embarked on similar paths. Across most countries in the region, regulators are actively updating their governance-related directives, placing further pressure on standards of governance. Bank Audi believes that good governance practice should be collectively embraced to promote the banking system rather than exercised severally by individual institutions and looked at as a competitive advantage. Indeed, a governance-related failure by a player in the market is likely to reflect badly on the whole industry.

In future years the global economy and the international banking system is likely to face new and unexpected challenges. The ability of individual banks to stand up to these challenges and emerge intact will largely depend on the pro-activeness and effectiveness of their individual boards, as well as on the skills of their individual directors and their ability to complement those of the chairman and the CEO.

Recent successes
Bank Audi has performed consistently well in recent years, even during the global financial crisis. Its consolidated net earnings reached $352m for the year 2010, representing a 21.9 percent increase over 2009. Furthermore, the figures for 2009 also represented a 21.4 percent growth over the previous year. This strong performance has been achieved while maintaining a high level of liquidity and capital adequacy. As testament to this, the primary liquidity-to-customer-deposits ratio stands at 49 percent and the capital adequacy ratio is 11.7 percent (both as at 31 December 2010).

The bank is also well-positioned as the largest bank in Lebanon and among the top 20 Arab banking groups, with consolidated assets reaching $28.7bn as at December 2010, with consolidated customers’ deposits of $24.8bn – an increase of $1.86bn compared to 2009. Over the 21 month period ending September 2010 (the most recent available data), Bank Audi was ranked second in terms of deposit growth among Arab banks with $7bn of additional deposits.

The economic crisis
Thanks to its risk-averse strategy, the bank was not directly exposed to the toxic assets that were at the root of global economic downturn, and maintained a constantly high level of liquidity and market capitalisation. As such it stayed largely immune to the credit crisis, achieving significant growth throughout the period.

The bank’s conservative policy was also in line with the policies of the Lebanese regulator – the Central Bank of Lebanon – which placed caps on loan to deposit ratios and imposed stringent controls and limitations on speculative assets and bundled-up debts, hence largely preserving the Lebanese banking industry from the effects of the crisis.

A new strategy, a new success
Persistently low international interest rates resulted in difficult operating conditions for many Lebanese banks, which, in 2010, led Bank Audi to follow a margin-focused strategy as opposed to a growth-focused one. This new direction has met with a significant degree of success, leading to a rise in spread from 1.65 percent per annum in the first quarter of 2010 to 1.8 percent in the fourth quarter. This was also coupled with an improvement in net operating margin, whereby the bank’s return on average assets reached 1.28 percent per annum in 2010 and its return on average common equity reached 16 percent, with a target of approximately 20 percent for 2011.

Going forward, the bank’s main challenge is to achieve its regional expansion and diversification objectives, becoming a top level regional player with each of its divisions a leading player in its field and country of presence.