This article is part of an Executive special report on wealth management and private banking. Read more stories published here, or pick up September’s issue at newsstands in Lebanon.
“Get on a plane from Middle Eastern Airlines (MEA) from Geneva to Beirut, and see how many bankers you have on that plane going and coming,” says Philippe Sednaoui, chief executive officer of Audi Private Bank, which is active in several countries spanning the Middle East and Europe.
Despite their alleged occupational predilection for sharp suits and bland ties, one will be hard pressed to assess on sight how many private bankers sit on flight MEA 213 on any given day of the week. But Sednaoui, whose work obliges him to regularly make the trek between Audi Private Bank’s two main business hubs in Beirut and Geneva, has a point. The Swiss financial capital is one of MEA’s best and longest served destinations in Europe. Business must be crisp, and Sednaoui might not be talking just about the flight when he says, “It’s nonstop.”
What is good for our national airline could still be a worrying indicator for those Lebanese financial institutions that vie for the profitable business of managing the wealth of the country’s citizens. Despite the obviously well lined pockets of a certain strata of the Lebanese population, much of this wealth is managed abroad. No Lebanese bank that Executive spoke with reported assets under management (AuM) in Lebanon of more than several billion dollars — in the low single digits.
“The [wealth management] market is not in the hands of the Lebanese,” says Sednaoui. “Lebanese money is at Pictet, Lombard, Credit Suisse, HSBC. It’s everywhere. I used to have [a wealth management role at] Barclays in Switzerland, and I saw it first hand. You would be surprised.”
Sednaoui says that AuM at Audi Private Bank, the largest Lebanese wealth management operation according to Bankdata’s Dany Baz, stood at $9.8 billion at the end of June 2014. However, the bigger part of that amount, close to $6 billion, is booked in the Geneva office, with Lebanon coming in second at just over $3 billion in AuM.
These are merely crumbs when compared to Lebanese wealth, which by all accounts is actually an unknown quantity. That is to say that wealth managers are not able to say either how many Lebanese billionaires there are or how much of the private national wealth is concentrated in the hands of the top one, two or three percent.
Popular lists of the world’s super-rich are entertaining to read but provide only a very poor approximation if one wants to assess the numbers of our billionaires and multi-millionaires. The six wealthiest people in Lebanon — or at least the ones that made it on the Forbes 2014 list of the world’s richest people — had a combined net worth of $13.5 billion. But as Executive has observed in encounters with some of our industry tycoons and enterprise builders, the Forbes list and comparable reports on high net worth individuals (HNWIs) have many holes when it comes to Lebanese billionaires.
All this means simply that there is a lot of Lebanese wealth that is not quantified in any official statistics. But it is clear that a great amount of this wealth will not be found in either the vaults or the fee earning asset management books of local banks. Sednaoui estimates that in addition to just over $140 billion in bank deposits, there is another roughly $120 billion of Lebanese offshore private assets inside the coffers of foreign banks, excluding the diaspora’s.
That is a lot of stored wealth for a small economy with a GDP of some $44 billion. It is difficult to pinpoint exactly how much of a missed opportunity this represents for wealth management businesses, but there is clearly untapped potential for Beirut based wealth managers to increase their AuM. To be fair to the handful of well known billionaires — Forbes lists only members of two families, the Hariris and the Mikatis — someone with this high net worth would have their own private offices and team managing their wealth, so it is not so much these ultra high net worth individuals’ money that is a missed opportunity for the banks. Rather, it is those of more ‘modest’ fortunes that the banks are seeking to target — which according to FFA Private Bank’s Chairman and CEO Jean Riachi start as low as $1 million.
Barriers to return
The problem, for once, may not be the Lebanese state and its greed and notorious dysfunctionality. While in many other countries wealthy individuals keep their assets in foreign banks for tax purposes, the reason for Lebanon’s exodus of wealth is historical. The story told by most bankers is that many wealthy Lebanese individuals, fleeing the war in the mid-70s, leaving behind property and land, took the tangible assets they could and placed their money in foreign banks. And since then, wealth managers in Lebanon have never been able to reclaim that money to their businesses.
Other barriers to wealth management in Lebanon are not linked the country’s troubled past. Instead, they have been produced by the ease with which local banks could attract wealthy clients through the most pedestrian of offerings: bank accounts. High interest rates on deposits in the country triggered the reflex for wealthy individuals to keep their money in local accounts. For comparison, “interest in Switzerland is a quarter percent. In Lebanon it is 4 percent,” says Sednaoui.
Banks could afford paying these deposit rates because of their vibrant business in Lebanese sovereign instruments where T-bills with tenure of three or five years still offer upwards of 6.5 percent interest. And the earnings potential was even starker two decades ago, according to Georges Abboud, head of the private banking department at Blominvest. Reminiscing how T-bills came with double-digit interest rates, he muses, “By doing nothing, you were making [a] decent return. No need to have an advisor … Since some people were very comfortable with the Lebanese risk, and by doing nothing they were making very decent returns.”
However, wealth managers across the board note that HNWIs have been steadily developing a greater appetite for a more diversified roster of assets, particularly in international capital markets.
“When people realized that interest rates have come down… they realized that they have to diversify from cash interest rate returns to other asset classes,” says Abboud. Roula Habis, managing partner at Optimum Invest, explains that HNWIs are beginning to understand riskier long-term investments, rather than keeping their money in deposits or money markets (see “Feeling our presence“).
Additionally, ongoing international regulations in the wake of the financial crisis have also put more pressure on wealth management businesses across the globe, with Lebanon being no exception. Habis explains that while she welcomes the regulations, internally it places more of a burden as they have to increase their payroll and hire a compliance officer, legal officer and anti-money-laundering compliance officer, with the increased costs placing a strain on revenue, especially for the smaller firms.
For larger regional banks, however, this presents itself as an opportunity. Sednaoui explains that because of these regulations, “many [international] banks are disengaging from non-core markets,” such as the US, the EU and Japan, and “do not want to be dragged into emerging markets and the underdeveloped world, because of terrorism, because of sanctions, because of reputational risk,” he says. “So we think there is room … Many big banks are retracting and it’s opening up an opportunity for regional players.”
Reeling them in
Besides the appetite for wealth management among HNWIs in Lebanon, which will most likely increase organically over time, wealth managers have taken several moves to consolidate their businesses — both in attracting and retaining customers as well as in cutting their losses and boosting their revenues.
On one hand, this involves cultivating specialized knowledge and providing clients with opportunities they cannot seek elsewhere. “The added value is the non-listed part. The added value is accessing these projects that maybe banks x, y and z or this person wouldn’t know about,” explains Optimum’s Habis. She says the tailoring of wealth management, which can reach as far as creating a fund for real estate in an attractive African market, can provide HNWIs the opportunity for portfolio diversification that will keep them loyal. “The idea is going out of the box and finding ideas for these wealthy people that will go out of the classic fixed income and bonds that the country used to deal with for the past few years and every other financial institution,” she elaborates.
And then there is the service. Habis explains that trust and attentiveness are very important factors that play into their relationship with the client. “Remember that for most Lebanese people, it’s mainly knowing people, trusting the people,” she says. Coddling HNWIs is certainly an international practice, but this might be even more the case with Lebanese wealthy individuals who are still getting used to the wealth management business. “It’s all about the service,” says Riachi. “This is why you retain your clients. It’s the same instruments everywhere, the same securities. So what matters is the quality of the people, the integrity, their professionalism, the quality of the back office … This is what makes a difference.”
Not to be forgotten, of course, is the good old fashioned strategy of consolidating the business to maximize profits. Audi Private Bank went through a restructuring in 2012, headed by Sednaoui who was also appointed that year, to consolidate their private banking business and unite a group of entities that existed under the Audi Group which previously acted more independently.
“Each entity had its own life, own marketing, business development, research, with some level of cooperation. But it wasn’t homogenous. So today, a banker wherever he’s based can offer his client the full array of products subject to local jurisdiction,” says Sednaoui. They also closed down a few branches they saw as superfluous, including one as far as Gibraltar. According to Sednaoui, these efforts have paid off in the relatively limited time since the restructuring, as Audi Private Bank has grown on average 15–17 percent in terms of annual net profits since 2012.
Despite the many billions of dollars that local wealth managers and their competitors from foreign private banks say are held by Lebanese HNWIs, the wealth management business in Lebanon today continues to face several obstacles. Some are historically pegged to the nature of the country with the outflow of Lebanese wealth; others are the same ones faced by wealth management globally such as keeping business profitable in light of tightened restrictions. Still a small sector catering to a select few, wealth managers in Lebanon will have to prove the worth of their business to a small and skeptical HNWI community.