Promising performances

Lebanese banks experienced a boost during the first half of the year, prompting hopes of an economic upturn

The rather tired theory that the banking sector is one of the sectors most likely to spur an economic upturn was given a boost by the promising performance of leading Lebanese banks over the past six months.

The major turning point for both the Lebanese economy in general and the banking sector in particular was the Paris II donor conference held in November 2002. While no direct material benefits seem to have trickled through to the economy, the overall confidence in the domestic currency, coupled with the image of stability portrayed by the government, have seen a redirection of funds towards Lebanon’s leading banks.

Among those banks, Banque Audi stood out with a considerable 20% increase in total deposits during the first six months of 2003, reaching $5.1 billion, and overtaking its rival Byblos Bank, which added almost 8% in deposits at $4.3 billion. BLOM Bank maintained its position as the country’s largest commercial bank, with its deposit base growing by more than 13% to reach $7 billion by June 2003.

Banque Audi also managed a staggering 50% growth in net income for the first half of 2003, relative to the same period of 2002. The bank’s net income jumped from $17.54 million in H1/2002 to more than $26.4 million in H1/2003. While net interest and commission income failed to register substantial growth, the main contributor to the impressive growth recorded during 2003 emerged as income from financial operations. In fact, net income from financial operations jumped a staggering 220% during the first six months of the year, reaching $19.6 million and contributing more than 74% of the bank’s net profits for the period.

BLOM Bank recorded a growth in net income of just over 5% year-on-year, reaching $42.8 million, while Byblos Bank’s net profits grew almost 10% from their June 2002 levels, leveling at $24.7 million. Bank of Beirut’s net profits inched up 1% over the same period, reaching $9.8 million.

Elsewhere, total deposits in Lebanese banks grew by almost 5% during the first half of the year, reaching LL57.6 trillion. As such, total deposits grew by more than 12% year-on-year, compared to a modest growth of just over 8% for the full year 2002. The accelerated growth observed during the first half of 2003 is a clear reflection of the increased confidence in the sector in general.

Moreover, overall confidence in the Lebanese pound has been reflected in the gains in LBP deposits as opposed to deposits in foreign currencies. As such, deposits in LBP have reached 37% of total deposits in June 2003, the highest level seen since February 2001. This compares to only 29% in June of last year.

Such developments speak greatly about the perceived outlook for the Lebanese pound locally, as the gains achieved in Lira deposits during the first half of the year have occurred despite the dropping interest rates on LBP-denominated deposits. Average interest rates on LBP deposits have dropped from more than 9.3% in January of 2003, to less than 8.3% as of June. On the other hand, interest rates on dollar deposits have been relatively stable, holding between 3.5% and 3.8% over the same period.

Despite the considerable growth in deposits, however, Lebanese banks have been somewhat wary of the domestic credit market. Total claims on the private sector have been fairly stagnant over the past year. Total lending to the private sector remained virtually unchanged between June 2002 and June 2003, settling around LL22.8 trillion. This compares to a growth of around 2.5% for the full year 2002. With regards to currency affinity, no major change has been noted on the credit market in Lebanon, despite the considerable difference in interest rates between loans in LBP and foreign currencies. As such, the vast majority of lending still takes place in foreign currencies, mainly in the form of dollars. Almost 83% of total claims on the private sector are in the form of foreign currencies, compared to 17% for the LBP.

In essence, the lack of growth in the credit market, coupled with the overwhelming dominance of foreign currencies in the debt market, illustrate the overall reluctance of major domestic bankers to lend. While such a position may be justifiable given the inability of the Lebanese economy to sustain economic growth and stability, an easing of self-imposed restrictions on the financing market in Lebanon would substantially contribute to growth in investments and consumption, thereby promoting overall economic growth.

On a more positive note, however, the Lebanese banking sector’s exposure to the public sector has dropped somewhat during the first half of 2003, after registering a sizeable expansion in 2002. In effect, claims on the public sector dropped from an all-time high of LL26.8 trillion in January 2003, to around LL24.5 trillion by the end of June. While the reduced exposure to the public sector has not yet played in favor of the private sector, it does provide banks with the reduced risk exposure and increased liquidity to promote corporate and consumer financing in the future.

However, while regional and domestic economic and political developments greatly influenced the performance of Lebanese banks over the past year, the banking sector itself did not fail to provide its own share of major developments, contributing to the overall growth momentum.

In a survey conducted and published by Euromoney magazine, four Lebanese banks appeared on the list of the Top 250 Commercial Banks in Emerging Markets. BLOM Bank placed the highest among Lebanese banks in 157th place, gaining 19 places since the previous year. Banque de la Méditerrannée placed 160th, followed by Banque Audi in 174th place, and Byblos Bank in 208th. While none of the Lebanese banks made it into the top 10, BLOM Bank and Banque Audi managed to improve their positions significantly and seem capable of maintaining such a positive trend given recent developments.

These encouraging developments, coupled with the progress made by Lebanese banks in Syria, where BLOM Bank and BEMO Bank (in collaboration with Bank Al Saudi Al Fransi) have obtained licenses to operate privately owned banks, are all positive signs that the sector is playing its role in the economic recovery process.