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Freddie C. Baz

LEBANON - Finance

Determined to Grow

Group CFO & Strategy Director, Bank Audi


Freddie C. Baz joined Bank Audi in 1991 as advisor to the Chairman. He is currently the Group Chief Financial Officer and Strategy Director of the bank. He is also the Deputy Chairman of the Group Executive Committee and Member of the Group Risk Committee. He has a PhD in Economics from the University of Paris I (Panthéon-Sorbonne).

"We had to expand in order to keep generating economies of scale and efficiency gains."

How did the launch of your Turkish subsidiary Odea Bank go, and how will it help expand Bank Audi’s regional presence?

Over the last few years, the most important development in the group was the launch of its Turkish subsidiary. We have been very lucky in Turkey to have been granted the first license in 14 years, so we are stepping in without incurring any goodwill. Having the luxury of being granted a license and entering a market without paying goodwill provides you with important flexibility in acquiring top-notch people, investing in the best technology, and acquiring all the necessary means to deploy your business plan. We are not just establishing a presence in Turkey to have another subsidiary; we have chosen Turkey on the basis of its strong fundamentals, and our strategy is to build in Turkey a subsidiary that would rank second to Lebanon in terms of assets and earnings on a three-to-five-year horizon. We have an appetite for growth and we have built a business model that, in principle, should lead to size in Turkey. Turkey provides a huge opportunity given its sizeable economy in terms of population and GDP and its significant engagement in the exponentially increasing trade, finance, and human flows between Turkey and the Arab world, including countries in which our group is present.

What have been your results in Turkey so far?

On November 1, 2012 we officially launched the business. In seven months we have been able to go from a greenfield operation starting from scratch to building a deposit base that represents close to a 1% market share in Turkey. To give you some benchmarks, two of the most successful foreign banks in Turkey, which are European banks having on average 22-25 years worth of presence, each have a market share in deposits of 2.5%. We have been able to achieve 40% of the market share of those prominent European banks in just seven months of activity.

“We had to expand in order to keep generating economies of scale and efficiency gains.”

What is behind this success?

At the end of the day, banking is about people. Banking is considered to be a capital-intensive business because, by definition, banks are subject to capital ratios. However, I believe it is a much more labor-intensive business because it is about relationships: acquiring customers and managing business relationships. Our competitive strength in Turkey is that we have acquired the best people. We have a very high-quality management team, with 10-15 years of experience on average. We got on board very well-established relationship managers, who enjoyed a deep-rooted knowledge of the Turkish customers and market. They were recruited from prime banks in Turkey with very important customer and account portfolios, and this has translated into franchise acquisition.

How do you assess the current performance of the Lebanese financial sector?

In order to have a good empirical assessment of the financial industry in Lebanon, it is better to start with the statistical experience. I believe statistical historical experiences are as much important as empirical experiences in assessing any business or industry. Lebanon went through very difficult times over the last 20-25 years. I am talking about the post-war era, which entailed the post-reconstruction period, the assassination of Prime Minister Hariri, the summer war with Israel in 2006, and so on. All throughout this period, the Lebanese banking industry showed a great deal of resilience. The performance of the financial sector in Lebanon has been consistently disconnected from that of the real sector. When we have a changing business environment, it affects the real sector much more quickly than the financial sector. The real sector has a limited resilience, depending on the magnitude of change in the environment. But despite the adverse trends we may have witnessed, the impact on the financial industry has been very limited at all times.

What factors have contributed to this resilience?

In figures, we have been able to add $76 billion in deposits in Lebanon since the assassination of Prime Minister Hariri in 2005, and $53 billion since the outbreak of the global financial crisis. From time to time there is a small drop, but it then catches up and the overall trend is noticeable growth. There is a very high correlation between this resilience and being so-called boring banks. As a matter of fact, boring banks have been the most resilient throughout the global turmoil. A boring bank is generally a deposit-rich bank, a retail bank, and a bank whose funding comes almost exclusively from customer deposits. On the back of strong fiduciary responsibility, the use we make of these deposits is a very careful one, particularly if this funding comes from customers who our branch managers know almost all personally. On the loan side, Lebanese bank lending is short-term, revolving around working capital financing and trade finance with huge guarantees, with a limited share for long-term finance and project finance. When we lend it is mainly to defensive and immune businesses; very little to volatile businesses. Normally we lend a maximum of 50% of our customers’ deposits. The remaining we keep in immediate and available liquidity with central banks and our correspondent banks, and in a portfolio of securities. We are considered boring banks because our balance sheet is so transparent; you do not need an expert in order to understand how clean it is, how liquid it is, and what quality there is in the bank’s assets.

What is your view of the central bank’s stimulus package, and what segments are going to benefit from this?

Those are coincidental measures. The Governor of the Banque du Liban is a wise man and very experimental, and his duties include boosting economic activity, being responsible for monetary and banking policy, and deciding which objectives should fit perfectly with the economic objectives of the government. Although the central bank is an independent entity from the executive and legislative powers in the country, the policies it implements should align with macroeconomic policies to ensure a permanent improvement in the standard of living and welfare of the citizens. This is where the Banque du Liban is doing its best in order to support those targets, though these remain coincidental measures of a limited magnitude. It would have an impact that could reach up to circa 1% of economic growth, which is not immaterial. These are wise policies aimed to help boost economic activity within a slowing economic environment.

What are Bank Audi’s regional ambitions?

Our initial expansion strategy (which is still ongoing, but with some slight adjustments) was to enter the very inner circle of real regional players. There are many large banks in the region. When you look at the regional landscape, the national champions in the GCC are NCB in Saudi Arabia, NBK in Kuwait, and QNB in Qatar. These are mainly domestic players, focusing almost exclusively on their internal market. None of them have expanded significantly outside. We can understand those strategies because there is so much wealth in their domestic market. For us, it is a different story. We became too big with respect to the size of our domestic economy, and we had to expand in order to keep generating economies of scale and efficiency gains. When you look at the regional banking universe, none of those banks are involved in interregional banking, or cross-selling countries and business clients. Regional banking for Audi is cross selling countries and business clients. It is like in trade finance, providing the Saudi importer with the LC opening and the Egyptian exporter with a supply of finance. We have a captive market share because we hold both sides of the equation. There are Kuwaiti banks covering Kuwait, Saudi banks covering Saudi Arabia, but none of them are really interregional. There are very few real regional players, but a huge need for them exists, so our real strategy was to become one of them. There is a very interesting market for cross selling. Our strategy was to become a very important regional player as soon as possible and to become as large as possible. The first results of our strategy are quite enticing and encouraging. We have been able, in less than three years of average activity in three markets only (Egypt, Jordan, and Syria), to build close to $7 billion in customer deposits, representing 22% of the consolidated activity of the group. The recent developments, particularly in Syria, impacted on our growth negatively; however, we are building for the future, so we are not driven by short-term considerations. In our wise management strategies, we adjust very quickly to adverse trends, especially material ones like those we have witnessed in the region, by putting in place a range of contingency plans and all the right buffers in order to protect our bank from “short-term shocks.” We entered Turkey at the right time. It was triggered by our view that a presence in Turkey is complementary to our regional presence. The license was provided after the outbreak of the Arab Spring, so it came at an excellent moment to compensate for a delay in the revamped business plan—a delay which was driven internally by a consolidation strategy rather than a growth strategy in Egypt and Jordan on the backdrop of a quick deleveraging in Syria in order to maintain the quality of our assets and to protect our bank from any short-term spillover effects. When prospects start improving, such as in Egypt, we will directly reap the benefits. We are actually looking to generate $45 million in profits from Bank Audi Egypt in 2013, after provisions and taxes. It is not as if we are doing nothing in those countries, but we could have done maybe two times what we are doing today if the environment had been more supportive. Our Turkish subsidiary offers a unique rebalancing opportunity due to the size of the Turkish market and the fact that our operating model in Turkey is proving to be successful. The end result will be considerably to the group’s advantage in terms of assets and earnings growth as well as our rating at large.

© The Business Year – July 2013



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