Beating the odds

Banks look for profit in lean times

Optimism has for years been a prominent feature of Lebanese banking, a central nerve embedded into the firm spine of conservatism that upholds the Lebanese banking and finance industries. The country’s banks all have reasons to ooze optimism, given the sector’s overwhelming importance in the national economy and their performance record of deposit security over decades while the country was drenched in deeply flawed politics, violent internal strife, regional warfare, and occupation.

Even if their business had been stagnant last year, Lebanese banks would have enough reasons to feel emboldened by 2003 for two facts. Namely, that they contributed an important onus to the year’s fiscal stabilization through their profitless subscription to special T-Bills and that the sector emerged unscathed from a fraud and mismanagement crisis centering on Bank Al Madina and its opaque business dealings. But far beyond staying afloat and managing the impact of their sacrifice on the altars of fiscal recovery, banking did not at all see a standstill or slacking of growth in 2003.

Nonetheless, banking representatives exhibited one curious change of perspective. Lebanon’s big commercial banks in earlier years had often harbored concerns over basic size limitations they had in comparison to the region’s big banking corporations or the possibility of international competitors intruding onto their markets. At the end of this year, they came to say that Lebanon is too small a market for the deposits under their management. Prominent members of the finance industry viewed 2003 with satisfaction for sector and companies. “The performance of the Lebanese banking sector was generally good in 2003. Annual profits will maintain their 2002 level, even though third-quarter profits were lower than those of the first quarter,” said Saad Azhari, general manager of the country’s largest bank, BLOM. With year-on-year growth of about 23 % in assets and deposits by the end of September, BLOM Bank performed above the sector’s good overall deposit growth, which is expected to reach 15 % for 2003. “As such, our market share in deposits increased to over 15 %,” Azhari said. “The bank’s profitability remained high, given that the first nine months net profits of 2003 reached $66 million.”

The runners up were equally upbeat. Banque Audi announced its third quarter results, claiming an increase in market share to nearly 12% and having captured over 30% of the sector’s total deposit growth. At Byblos Bank, where year-on-year growth of assets and deposits was reported at 39% and 31% at the end of the third quarter, assistant general manager Semaan Bassil told EXECUTIVE, “Relative to what is going on in the market, our profits are more than adequate.”

While the retail banking leaders may have been fortifying their positions, players in specialized banking and finance houses also could spread word of good tidings. “The main point in 2003 for us was a 17% increase in deposits and 20% growth in profitability, as values BEMO is expecting to close the year with” said Ronald Yazbek, assistant general manager at Banque Europeenne pour le Moyen Orient (BEMO). The bank had been strengthening its specialization on private and corporate banking and already harvested the first fruits of measures such as expanding its private banking team and entering into a partnership with Riyadh-based Banque Saudi Fransi. At another specialized bank, an executive did unhesitatingly express his pleasure over the mid-sized institution’s performance, even as asset growth would be below the sector average. “We are pursuing the opposite strategy, emphasizing profit growth and not asset growth,” he said, “2003 was an excellent year. But 2004 will be challenging.”

Cautious notes dominate the melodies, which many in the choir of banking leaders intone regarding the coming year. “As for 2004, we expect a squeeze in banks’ profitability,” Azhari said, giving as the first main reasons for the lowered outlook that banks’ stock of high-interest T-Bills acquired pre-Paris II would mature in the course of the year, along with high-interest, two-year deposits with the central bank. As a second reason, the BLOM executive named “higher decrease in interest rates on loans and advances as compared to the decrease in interest rates on deposits, thus leading to further drops in banks’ interest margins.”

His bank expects continuous asset growth, he added, “and we will have to redouble our efforts to maintain the same level of profits as in 2003, due to the reasons that apply to the banking sector as a whole.”

Current profit margins cannot be sustained in 2004, concurred Bassil. “Banks will have to be more stringent in provisioning,” he said, “this will result in lower net profits.” Lower growth in the economy and lower profitability would lead Byblos and other banks to rationalize, restructure and consolidate their business. “It will push banks to rationalize faster, more systematically, and assure that every dollar spent will bring a certain level of return.”

“We don’t see any problems, to the contrary, we see very good prospects for the coming year. For us, 2004 is very positive,” Yazbek opined in a vote of fundamental optimism. BEMO is less exposed than others to certain risks, and expects further benefits from the base it created in 2003. More detailed, BEMO anticipates a boost for the business at its Cyprus branch after Cyprus becomes full EU member next May, and also foretold “good synergies” that would arise for the Beirut operation from BEMO’s participation with Saudi-Fransi in the new Syrian banking venture, scheduled to assume operations still before end of 2003. As far as upward expectations for the coming year at BLOM, Azhari pointed out expansion plans in the local and regional markets, including opening two new branches here, a third in Amman, and the launch of the “Bank of Syria and Overseas” in Damascus in early 2004. Bassil similarly emphasized that Lebanese banks would need to utilize growth opportunities in other countries. Bank Byblos’ venture in Sudan signified a pioneering achievement for the entire sector here by marking the first instance in which a Lebanese bank addressed a local market abroad. “Sudan is an important step for us, a test and learning curve,” he said. “We will be putting all our efforts and energy into it over the coming period, and after one or two years, will see the outcome.”

Compared to the banking sector, Lebanon’s financial firms still have large uncharted territories to explore at home. For financial institutions, brokers and trading houses, 2003 was a year of regaining much needed momentum. At independent finance house Financial Funds Advisors (FFA), chairman Jean Riachi sounded exceedingly satisfied in comparison to the past few years. “2003 was a good year for us in terms of increasing our customer account base,” he said. “We have also seen an increase in terms of revenue, knowing that we are coming from a low base because 2001 and 2002 were bad years.” FFA received good responses to funds it was marketing in collaboration with a European issuer, GLG, and could embolden the volume of its money management business. Similar moods prevailed at the Arab Finance Corporation (AFC). “The company is doing much better than last year at this point in time,” said general manager Tarek Ahdab. “AFC is positioned to profit from any upturn in the market. In the past six months, we saw a nice upturn.” Both finance houses implemented new internet-based trading facilities in 2003. FFA launched online currency trading at the end of the summer and AFC introduced two platforms in autumn, AFC Futures and AFC Securities. Even as they expect 2004 to continue the positive trends of the last six months, brokers and finance houses restrain these hopes to their activities on international markets where the outlooks are great. “In my opinion, we are at the beginning of a long-term bull market,” Riachi said, adding as general note of caution “but I could be wrong.”

By contrast, Riachi’s view on domestic financial markets resembles a sheer outpouring of positive will power. “We have not surrendered to the idea that the Lebanese market is dead,” he said. “We desperately believe that it can be revived. It is our raison d’etre.” AFC similarly would see their true edge in the local and regional markets while relying on trading in international markets on behalf of its clients for their bread and butter business. ”We are reasonably optimistic about the country,” Ahdab said, but the firm’s strategy would remain focused on electronic trading platforms and foreign markets, plus continuing to build the client base and increasing advisory business in steady and slow growth. “We are in a tough business in a tough environment, competitor wise, local market wise, and in relation to political and geopolitical risks. Any progress is going to be a slow one.”

With important measures for the regulation of Lebanon’s financial markets still outside of visibility, advocating Beirut as base of a financial firm is still a tough challenge, but the FFA chairman insisted that it would be viable. “Disposable wealth exists and the rate of new account openings [at FFA] is accelerating,” he said. “We believe our model – a small finance house in Beirut serving people for their investments – is working for us. We could even increase it. But unfortunately, we don’t see a great deal of interest in the Lebanese market.”

Where Lebanese bankers and finance house managers echo each other in agreement is their views on the impact of fateful national decisions (or indecisions) on their business. End-of-service reforms and public sector productivity increases are a must for Lebanon, along with privatization and securitization of state assets, Azhari said. “The implications of further delays will negatively affect the level of the public debt and the budget deficit. Consequently, the national and international confidence in the recovery of the Lebanese economy and in finding a permanent solution to the budget deficit’s problem will quickly vanish.” “The last few years were tough. However, it could still get worse,” said Ahdab. “Anything that stops or slows reforms is not going to have a good impact. If debt continues to grow and they never privatize, things could get worse.”

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.