The country’s engine is still running. Despite all the pressures that the Lebanese banking sector faced last year, they still managed to grow their deposit and asset base and extend their lending arm to the country’s private and public sectors. Their profits are not as rosy though.
Lebanon’s domestic bank assets recorded annual growth of 8 percent last year to $152 billion, about three and a half times the size of the economy. The growth is slightly below the 9 percent registered in 2011 and falls short of the 14 percent average growth of the past five years, but given the issues that the sector is dealing with — upheaval in neighboring Syria, instability at home and increased international scrutiny, to name a few — this asset growth is welcome news. Deposits flowing into bank coffers also rose 8 percent — in line with the Central Bank Governor Riad Salameh’s expectations — to stand at $125 billion, 82 percent of the sector’s assets. This growth is commensurate with that of 2011 and down from a five-year average of 14 percent. “Banks are still attracting deposits because the interest rates offered are higher than the ones in Europe and the United States,” says Marwan Mikhael, head of research at Blom Bank. “The good thing is that this increase was enough for the banks to finance the government and the private sector at the same time without a crowding out [effect],” he adds.
More loans, less profits
Outpacing deposit growth was lending with a 10 percent increase; this is down from 13 percent in 2011 and the 18 percent average growth of the past five years. However, given the country’s dire economic conditions, this growth is still encouraging. The vast majority of these loans, 89 percent, went to the residents. “It was just more of the same: tepid deposit growth, margins stable, interest income growing [by] mid-single digits, fees flat to down and revenue generation offset by provisions,” says Nadim Kabbara, head of research at FFA Private Bank.
Pursuant to the conservative nature of the sector and to hedge against the adverse impact of instability at home and in neighboring countries, mainly Syria and Egypt, banks continued on taking provisions last year with the ratio of provisions to doubtful debt reaching 79 percent. “They have taken quite a bit of provisions for Syria and I don’t think it will be that material going forward. The fact that the language [of management at local banks] changed from ‘we don’t know what is happening in Syria’ to ‘we want to be ready for when Syria comes back’ is a bit more positive,” adds Kabbara. Another indication of the resistant quality of the sector’s balance sheet is the ratio of non-performing loans to total loans, which stood at 3.3 percent last year, down from 6.8 percent in 2011.
The less cheery picture comes from the profitability of the banks. While the consolidated figure of the total banking sector was not yet available as Executive went to print, the results of the five listed banks, including the country’s three largest banks, show a contraction in profits. Pressured by the regional and domestic instability, which compelled the sector to prudently take specific and general provisions, the consolidated profits at Lebanon’s five listed banks — Bank Audi, Blom Bank, Byblos Bank, Bank of Beirut and BEMO Bank — registered a 2 percent drop last year to stand at $966 million, down from a growth of 2 percent the previous year. These profits exclude the $44.5 million extraordinary gain that Bank Audi booked from selling 81 percent of LIA insurance; including the sale, net profits were up by 2.4 percent to $1 billion. Assuming these five banks reflect the performance of banking overall, 2012 would be the second year of contraction for profits of the banking sector. Net earnings dropped 5 percent in 2011, the first drop in nine years.
For 2013, Mikhael doesn’t expect provisions to hit profits, as “there are not much left to be taken,” he says. As regional instability persists and as the country’s economic growth remains subdued — with the International Monetary Fund expecting the economy to grow by 2.5 percent this year following a 2 percent growth last year — the banks are set for another challenging year. Crisis management seems to be the name of the game. “If you can try to forecast what provisions could look like, you can have an idea as to what profits should be. At the end of the day, banks don’t want to show declining profits; confidence in the banking sector is paramount,” says Kabbara.
“The main challenge for banks now is to continue on growing internally and to expand regionally by finding the main places where banks can diversify their sources of income,” adds Mikhael.
Be it Turkey, a country that Bank Audi and BankMed have taken a bet on; Australia where Bank of Beirut is venturing; Iraq where Byblos is advancing, or any other country with lucrative growth prospects, banks are going to have to act fast and diversify their sources of revenues in order to overcome what looks to be another testing year for the country’s economy.