To step into the workplace of the retail banking leader in Lebanon, one passes through the hallways and anterooms of a busy lender’s back office operation. With a view, albeit an unspectacular one, from the tenth floor, the corner space that BLOM Bank’s retail head Elias Aractingi commands at work is both functional, and a comfortable backdrop for a discussion of the bank’s retail performance.
The office is not located in BLOM’s gleaming banking palace in Verdun however, but a vigorous 10-minute jog away in the Hamra district. Aractingi says he frequently makes the short commute and quips that his department’s location in a secondary building was necessitated by their retail banking success of recent years, which has far exceeded expectations held in the 1990s when the headquarters building was designed.
“We are the leader in housing, car loans, personal loans and in credit cards if you look at outstanding balances,” Aractingi says confidently. In 2012, BLOM’s retail loans were worth $2.1 billion, 34.8 percent of its total $6 billion loan portfolio, according to the bank’s annual report. The latter expanded 5.3 percent to $6.3 billion by the end of 2013, according to the latest results.
It may be a stretch but the retail department’s distance from the head office illustrates the status of second fiddle that retail banking has historically played in the sector. Over on the other side of Beirut, the retail head for Byblos Bank, Gilbert Zouein, reminisces about how some competitors belittled the activity as recently as the 1990s.
“Retail banking has expanded very much since 1999, and even the mentality of the banks has changed,” Zouein tells Executive. “When we launched the first retail loans four to five years before the competition began to think about it, [other banks] said Byblos was foolish but we were really not the fools.” Unlike the vigorous double-digit growth rates of 2005 to 2011, market demand for consumer loans in 2013 was flat and as subdued as it had been in 2012, Zouain adds.
As the retail banking culture has taken hold, Zouein says Byblos has retained its edge as one of the top three banks to plough the fertile field of retail. According to Zouein, Byblos’ retail lending portfolio rose from $1.4 to $1.6 billion from 2012 to 2013. In 2013, the bank’s total net loans amounted to $4.5 billion, 9.5 percent up from a year earlier.
The Alpha lenders
Other Alpha banks (banks with deposits above $2 billion) say they have seen increases in their retail lending in 2013. Ronald Zirka, head of retail lending at Banque Libano-Francaise (BLF) says, “Last year was a good year for us in retail banking; we achieved an increase of more than 30 percent in BLF’s retail lending portfolio in 2013. We had not been expecting such numbers for 2013 because 2012 was not a very good year.” According to him, the lender, whose assets stood at $10.4 billion in mid 2013, saw growth of 15 to 20 percent in demand for car loans, and did 40 to 45 percent more business in housing loans.
For slightly larger peer Bank of Beirut (BoB), 2013 was also an “excellent year” in retail lending and similar in growth to 2011 and 2012, says Georges Aouad, the head of retail banking at BoB, adding that the bank’s retail portfolio grew from a very small volume of $30 million in 2005 to around $1 billion at the end of 2013. “The bank’s main driver of business and profits is still the corporate line, but we are growing on the retail side, and our retail banking contributes a share to the bank’s profits that is growing year after year,” he says, adding that the bank’s strong overall performance was reflected in profit growth from $117 million in 2012 to $147 million in 2013.
Opportunities in retail are also at the center of attention for Alpha group member Bank of Beirut and the Arab Countries (BBAC) and Bank Misr Liban (BML), a bank with a strong position in the Beta group. Both are among the numerous Lebanese lenders who have taken strides in developing their retail operations fairly recently.
BBAC’s head of retail, Camille Moujaes, explains that the bank’s top management is convinced of the potential of consumer banking and has committed to a sizeable investment into the retail side in order to reach asignificant share of profits from the activity. “In our loans-to-deposit ratios, retail lending represents 12 to 13 percent of total deposits while commercial and corporate loans represent around 30 percent,” he says. “In all our retail lending we are searching for new markets for purposes of diversification and that is why in 2014 we will focus on increasing our credit card base, which is still relatively small.”
According to Bassem Hassan, the assistant general manager in charge of retail at BML, the bank has awoken from a period of unremarkable performance after a management change at the end of 2007. Its growth rates in the past few years reflect the commitment to reposition the bank, and retail played an important role in that effort. Retail is a major growth driver for BML, he explains “because we need to regain market share.” He says BML reinvented itself over the past five years by renovating its branch network and expanding from 14 to 18 outlets, rejuvenating its human capital and developing retail products that had been wholly absent. “We moved from zero retail in 2008 to $110 million today and have 60 percent retail, and 40 percent corporate in our lending portfolio. [Within the retail portfolio] personal loans account for about 40 percent, car loans for around 10 percent and housing loans for another 40. The remaining 10 percent are divided between tuition loans, credit cards and other small products.”
Housing loans dominant
The growth of retail banking across the sector was strongly correlated to the expansion of the real estate market. This was on the one hand characterized by a surge in unit prices, and on the other hand aided by a spectrum of loan subsidies ranging from offers to low-to-average income earners under the scheme developed by the Public Corporation of Housing, to several rounds of subsidies for medium to medium-high earners which the Banque du Liban (BDL), Lebanon’s central bank, initiated in 2010.
At BLF, housing loans constitute 60 percent of the retail portfolio, Zirka explains, attributing the excellent growth the lender achieved in this segment last year to their “strategy to follow the biggest developments [and developers] in Lebanon such as Beit Misk, Waterfront City, Sayfco and Zardman.”
BBAC’s Moujaes puts demand for home loans in the context of the economic situation. “Concerning housing loans, it was a relatively good year considering all the challenges that the country is facing.”
“The demand for housing loans is thriving,” agrees Zouein, specifying that the share of housing loans in the Byblos Bank retail portfolio is around 47 percent.
Personal loans
The marketing of personal loans is a business where Lebanese bankers are facing perhaps not so much shifts in customer preferences but a certain price inelasticity of demand. Even though interest rates on personal loans easily reach 16 percent per year when all costs associated with borrowing are taken into account, the bankers say they didn’t notice a drop in the appetite for personal loans.
Customers who are looking to borrow “are not influenced by the [interest] costs as much as they are influenced by whether they can afford the payment,” explains Byblos’ Zouein. Thus, although BDL has mandated all banks to display the full costs of their loans in both their contracts and all communications, such as billboards and magazine advertisements in form of an annual percentage rate, or APR, he has not seen a great impact on inquires. “We have not received any comments from customers on the APR,” he says.
Under BDL’s directive, banks have started representing the cost of loans in a more comparable way than in the early days of Lebanese retail banking when loan conditions were often shown as flat — and thus deceivingly low — interest rates or where offers were directly misleading by advertising ultra-low interest but carrying exorbitant one-time fees or file charges.
According to BLF’s Zirka, the mandate to display the APR was phased in last year and the information is to the benefit of what he calls “good customers,” meaning those folks who have regular incomes and sound financialprofiles. “Good customers are sensitive on interest rates, sensitive on the monthly payments and on the costs related to insurance such as life or fire policies that are required as part of the loan,” he says.
There are other customers, of course, and specifically those for whom “there is a risk in the current economic situation to take out a loan at any cost because they are desperate,” acknowledges BLOM’s Aractingi. But as he sees it, these people are often all too aware that their loans carry a very dear cost. “For many of the people for whom you are probably concerned that they should understand [APR], I can tell you that they might understand it but they don’t care so much about it.”
He claims that the high interest on personal loans is furthermore not too much of a consideration if the borrowed amount is limited to a few thousand dollars. “It depends on the loan. For most of the small loans, what the customer cares about is the availability of credit and not the cost of credit.”
For the bankers, the art is to service demand and make profits. In the experience of BML, the main demand points in 2013 were in personal loans where people needed to borrow for consumption; as Hassan notes, this demand is to be considered with scrutiny. “There are people who will accept any terms but those are the people to whom you should not lend,” he says; as such, BML does not give out loans just on request. “If a person has a good employment record and his salary comes into the bank, then we can lend to them.”
Cautious is my middle name
Across the banks that discussed their retail universe with Executive last month, conservative was a shared word of emphasis.
Despite calculating substantial risk premiums into their personal loans and unsecured credit offerings, and despite confessions of aggressive retail strategies by several lenders, all the bankers we spoke to emphasized their institutions’ high scrutiny of applications from retail borrowers. They also emphasized, without exception, that retail loan defaults in their portfolios are low.
“We, as Bank of Beirut, have a very strict and very conservative lending policy, and we don’t look at booking high sales volumes; we are looking at how the money that we are lending today will come back to us, because this money is not ours, it belongs to the depositors,” explains Aouad.
BBAC’s Moujaes says, “We apply a conservative policy which has proven beneficial for the bank; that is why our ratios of non-settled loans are very low, at one to two percent in the retail portfolio, even though retail requires mass production.”
BLF’s Zirka says, “because we are a conservative bank, our strategy did not change since we launched our retail activity in 2005. Our default portfolio is very small, less than one percent, which is nothing when compared with retail business worldwide where banks have between 7 and 11 percent defaults.”
Lebanese banks are counting on political improvement and the improving consumer confidence going into 2014. Growth of retail lending is a complex proposition however, not only because of the economic climate, but also due to the intense competition in a country where the number of branches is approaching 1,000, and where the number of ATMs has more than doubled in the past ten years, reaching 1,435 in the beginning of 2013 according to BDL’s records.
Smart Branches
New distribution channels are being developed and implemented, including ‘smart branches’ where the customer can interact with an agent by video conference. Bank of Beirut’s Smart Branch in Downtown is the latest example and, according to Aouad, it even facilitates the opening of an account in as little as ten minutes.
Progressing into 2014, retail bankers in this eager environment will be pushing new products, new channels, and plenty of marketing buttons. Most of all, they express optimism that the Lebanese retail banking market is today on a strong path to full maturity even as question marks linger.
“We did not stop developing new retail products in the past year and we expect to have better demand in 2014 after some political indicators are improving,” says Zouein. But he is sober in his expectations, adding, “However, we have to wait. What we felt in the market in January and the first two weeks of February was still very slow work and below the equivalent period in 2013.”
