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Strategic Reasons for a Capital Increase at Byblos Bank:

Growth

Today, Byblos Bank consistently ranks in the top tier. Its business is well diversified, its position strong and its knowledge of its markets highly perceptive. However, it cannot afford to standstill. It must focus on improving its operating performance and maintaining its growth and internationalization strategy in order to create value for its shareholders. 

One key element of this initiative is the allocation of new capital to fund sustained and profitable growth while reinforcing the Bank’s balance sheet. Improving the Bank’s capital strength will allow us to take advantage of growth opportunities in the region and consolidate our financial standing. Moreover, increasing the capital base will enable the implementation of much-needed technological infrastructure, which will support the expansion of the Bank’s service offerings and consequently raise its competitiveness. 

As capital is essential in reaching the adequate size of a regional player, size, in turn, is significant as it allows greater notoriety, better rating, economies of scale and improvement in the cost of funds, as larger banks can borrow cheaper. Besides, the size of a bank’s capital is its first protection against many of the banks’ risks, whether credit, liquidity, operational or market related.

International Diversification

A need for a strong capital base is of prime concern for Byblos Bank as it is expanding its presence in the MENA region and reinforcing its presence in Europe. 

This year’s Byblos Bank new strategy is to target the entire Arab Diaspora in Europe (not only the Lebanese) and offer it a wide range of banking services (direct lending, trade finance, fiduciary, capital markets, etc.). Consequently, the Bank needs to have this strong capital foundation in order to sustain such anticipated development. It is, as a result, seeking to increase Byblos Bank Europe’s paid up capital from Euro 20,000,000 up to Euro 100,000,000. The Bank will subscribe to the capital increase in accordance to its prorate shareholding (100%).

Similarly, Byblos Bank is planning to boost Byblos Bank Africa’s (Sudan) paid up capital from USD 12,000,000 up to USD 25,000,000. Hence, the Bank will subscribe to the capital increase in accordance to its prorate shareholding (65%). 

A wider capital base will also support Byblos Bank expansion to Syria, as the opening of a subsidiary in this country will shortly be taking place.  Byblos Bank and the OPEC Fund will jointly own 49% of the Syrian subsidiary (respectively 41.5% and 7.5%), thus leading us to contribute to height of USD 16,600,000 to the total paid up capital (USD 40,000,000).

In addition to these recent expansions, the Bank will certainly be escalating this trend in the future in order to consolidate its regional presence and maintain its leading position in the banking sector.

Capital Increase to Support Bank Strategy

Currently, given its balance sheet structure, Byblos Bank is largely above the BDL regulatory requirements in terms of Capital Adequacy Ratio (19.9 %, based on the 2004 financial statements, vs. 12% imposed by the BDL and 8% as per the international standards). 

In parallel, as Basel II norms are expected to be in force in 2006, the Bank has started to include approximate risk measures for market and operational risks, in addition to credit risk (only item previously taken into consideration under the Basel I framework). 

As a reminder, Basel II Accord relies on three mutually reinforcing pillars, which allow banks and supervisors to evaluate properly the various risks facing banks. These pillars are: 

1. Minimum capital requirements
2. Supervisory review
3. Market discipline

Byblos Bank’s current capital position computed in compliance with Pillar 1 of the Basel II Accord (credit, operational and market risks) is around 12.21% and shows that the Bank is in compliance with international standards. Even in case of a more pessimistic scenario and a lowering of Lebanon’s sovereign risk rating (below B-), the Bank’s capital adequacy ratio is estimated to be around 8%, which means that Byblos Bank will still be abiding by the international standards.  Nevertheless, in this case, a capital cushion might be needed for prudential purposes especially with the international expansion of the Bank.

Finally, Basel II norms will require vast amounts of historical data, advanced techniques and software for risk calculations. This will translate into huge demands for IT and outsourcing services. Accordingly, Byblos Bank is expected to rely heavily on new technology infrastructures, involving major investments.

Letter from the Vice Chairman- General Manager to Shareholders, Sep. 20th 2006

Dear Byblos Bank shareholders,

The recent tragedy that struck Lebanon during the past two months has unfortunately changed the context prevailing during the first half of 2006 with all the tremendous expectations and promises that were carrying our country towards high growth figures and unprecedented tourism and investment flows.

However, as we all know, this is not the first time the Lebanese people have been asked to overcome a new hurdle and this is not the first time Byblos Bank strives to participate in this effort. A few weeks ago, we were proud to announce our commitment regarding the reconstruction of the Fidar Bridge in the Jbeil region. This contribution is strongly symbolic for us as our success has historically relied upon weaving ties between the various Lebanese regions and communities. Not to forget all individual and group initiatives spontaneously taken by Byblos Bank staff, and especially by our colleagues in the South of Lebanon who have bravely volunteered during the July 2006 war by providing assistance to the victims of the conflict.

Today, soon after our country went through hard and dangerous times, we thank God our employees and families did not incur significant losses. Our branch network, which was partially paralyzed during the last hostilities, especially in the South of Lebanon, is now fully operational again and our staff are pleased to welcome you and to bring an answer to all your banking needs. Within the same context, we grab the opportunity to address our thanks and encouragements to our two branches in Haret Hreik and Bint Jbeil which, despite the serious damages incurred, were among the first branches to reopen in these devastated regions.

Despite the recent turmoil that has hit our country, our business continuity plan enabled us to quickly take the appropriate measures in protecting our processes, data, IT systems and other physical assets. Byblos Bank was among the first banks in Lebanon to put in place a back up system, to avoid operational risk in handling physical documents and checks, as well as to set up a totally operative support site in the region of Jbeil as a back up for Beirut in case of emergency. Within the same framework we are also very thankful to our overseas branches for their support and prompt adaptation in the management of this unexpected crisis. Based on this experience, we are still in the process of fine tuning our business continuity plan in order to be as reactive as possible in case of any new emergency situation.

Moreover, our lines of businesses have made their best to adapt and ensure a total continuity of our operations. The war impact on our Corporate and Retail activities has been thoroughly assessed and we believe that the minor damages incurred can be easily absorbed thanks to the efforts deployed by our relationship managers to assist our clients and to accompany them during the difficult times they are going through.

In terms of deposits outflows, we applied the lessons drawn from the post-Hariri assassination experience and were able to advise and retain our depositors, which allowed us to minimize the impact of the war. Our branches’ staff and private banking officers also did a great job in this field and should be warmly thanked for their endeavors.

Today, and given all the above-mentioned developments, we stand facing new challenges, and wish to renew our commitment to exert utmost efforts to justify your faith and confidence in our future.

Semaan Bassil
Vice Chairman - General Manager
Byblos Bank S.A.L.