A good starting point for reviewing the Lebanese banking sector at the end of 2017 to study a document that was published early in the year and is referred to in financial High Valyrian as a FSAP. For common folks, this stands for Financial Sector Assessment Program. A FSAP is undertaken by the institutions missing from Westeros: the World Bank and International Monetary Fund. To augment insights from the FSAP on Lebanon, which was published under the title Financial System Stability Assessment, one can turn to the findings of the IMF’s Article IV consultations on Lebanon.
For readers who are interested in super-condensed material, the entire economic narrative of Lebanon in 2017, and 2016 before it, is contained in FSAP’s opening paragraphs, in just two sentences: “Lebanon has maintained financial stability for the last quarter-century during repeated shocks and challenges,” but “over time, macroeconomic and financial vulnerabilities have accumulated.” This is the Lebanese paradox of endurance, resilience, and risk in a nutshell. In a sense, nothing more needs to be said about the matter of the tiny Lebanese economy.
As for the banking sector, the FSAP elaborates that despite economic and political shocks, “confidence in the banking sector has been sustained … and the banks have grown and remained profitable.” About Banque du Liban (BDL), Lebanon’s central bank, the report observes, “BDL plays a critical role in sustaining confidence, although, without sustained fiscal adjustment, there are limits to these policies.”
The assessment, which runs to nearly 80 pages in body text and appendices, concludes by saying: “Developing a strategy that addresses the elements noted above, including eventual withdrawal of BDL’s economic stimulus programs, and bringing in views from the financial industry and other stakeholders, could build consensus around reform priorities and sequencing with due regard to financial stability and integrity concerns.”
[pullquote]There are 52 insurance companies for a $1.5 billion market. This results in fierce competition and lower market standards[/pullquote]
This is just as true at the end of 2017 as it was a year earlier. What the paper was naturally unable to predict, however, was the journey of national sentiments from the end of last year to December 2017, a whitewater adventure in a raging stream of unpredictable political twists and economic turns. On this ride, the banking sector proved to be an essential raft of stability, providing stabilizing effects on the financial economy, such as wealth management and insurance, and on the entire country. Moreover, while the past year saw some rumors and debates over allegedly impending financial and economic doom owing to the central bank’s monetary policy, the year’s dangerous instability was not at all related to banking or BDL monetary policy. It arose from pure politics.
The 2017 narrative in brief
In rough strokes, the Lebanese ride through the year was defined by local politics and international circumstances. The journey of notable twists began with political declarations of optimism after the formation of a government in December 2016. Based on this optimism, banks and economic stakeholders started January 2017 full of hope for improved performances. For bankers, February brought with it the first turn toward concern, over speculations about the upcoming end of BDL Governor Riad Salameh’s term. Then, later in spring, concerns in the banking sector grew as reports of new American anti-Hezbollah measures emerged. Speculations and rumors over Salameh’s resignation and debates in the United States over the Hezbollah International Financing Prevention Act (HIFPA) built up uncertainty throughout spring 2017, accompanied by some research essays and speculation about Lebanon’s long-standing economic imbalances, the stability of the lira, and sector-internal matters such as upcoming board elections at the Association of Banks in Lebanon. While political unity and reform remained an issue throughout the first half of 2017, May and June brought the Salameh question and Lebanese political concerns back to the front burner, via the urgently needed new election law.
From outside Lebanon, the global implications of the new regime in the United States and fears over a possible spread of populist influences in Europe spiced up the local journey with imported political concerns, until election outcomes in the Netherlands and France calmed minds all around. In the context of global developments, however, tensions soon erupted into a new bout of mad politics, with North Korea on top of the insanity pole. A competing political performance on center stage was delivered by new global twittertainer, The Donald, with his bizarre “Trump First” show.
Leading financial markets in the US and Germany, in the meantime, achieved stronger growth than pundits had predicted at the onset of 2017. Throughout the year, large economies reported improvements; the picture was peppered in the year’s second half with the occasional dire warning against complacency and “frothy valuations,” uttered by financial powers like IMF head Christine Lagarde or the Bank for International Settlements in Basel.
In Lebanon, July brought a boost of relief to banking emotions as Salameh’s new term was confirmed. Lebanese banking and political officials polished doorknobs in the US in August, while the Lebanese focused on their summer vacations. HIFPA worries, meanwhile, were swept under a rug of artificial calm for a while, only to reappear later in the year (see below for the timeline of HIFPA adoption in the US). In mid-summer, the mood was again dampened by another wave of rumors about trouble for the Lebanese lira and the economy, peaking in a paper in which noted economist Toufic Gaspard argued his case for addressing the “Financial Crisis in Lebanon.” The paper even triggered a sanctimonious response from the usually taciturn BDL.
October came with more optimistic declarations, as locally-held international and national conferences kept bankers on their feet. But any hopeful mood was blown come the first weekend in November and the surprise resignation that Prime Minister Saad Hariri chose to deliver via a Saudi-owned TV network from Riyadh. Thus ensued a month-long story of verbal panic, damage control, and reassurances, followed by ostentatious relief in early December.
Throughout 2017, BDL Governor Salameh iterated his assurance of stability in conferences, interviews, and interventions on all sorts of occasions. At practically every major appearance, he repeated the statements which he had given at the end of 2016, such as, “Our holdings in foreign currency allow us to think that we can keep the Lebanese lira stable,” or affirmations of determination for maintaining interest rates. At a conference in July, just to cite one example, he offered his mantra, “The Lebanese lira is stable and will remain so,” and assured his audience, “Interest rates in Lebanon are stable.”
In no month of 2017 could one count more of these assurances than in November, when the governor voiced his assurances of stability not only nationally, but also sought to appease international concerns about the Lebanese situation. Even when asked in mid-November by a CNBC interviewer how frustrated he was about the disruption of Lebanon’s economic recovery by the latest political turn, Salameh’s answer was, “The Lebanese lira will remain stable.”
By early December 2017, the assurances appeared to have achieved their purpose. Although political question marks still linger en masse and no conclusive summary on the performance of Lebanese economic indicators for full-year 2017 can be drawn up, the performance of the banking sector for the first nine months of the year has been—when compared also to the rather exceptional boon year of 2016—reassuringly stable. Banks in the top tier of the sector delivered remarkable numerical normalcy. Assets rose, deposits rose, and even lending showed increases that seemed commensurate with the overall economy’s (subdued) growth (see comment by Bankdata).
Details about the loan activities by the largest Lebanese lender, Bank Audi, reinforce the impression of shifts in accents within overall persistency. Grace Eid, head of retail banking at Bank Audi Lebanon, informs Executive that the lender saw “strong development in domestic-loan issuance in Lebanese lira,” especially with regard to personal loans. Eid notes an inversion in this segment in particular, saying that in 2017, sales of lira-denominated loans outperformed dollar-denominated ones, whereas in the year 2016, “45 percent of our personal loan executions were in Lebanese lira, versus 55 percent in US dollar.
“Regarding the home loan, no major changes were witnessed during the past two years, as 80 percent of our lending portfolio remained in Lebanese lira. Although our strategy in 2017 was to increase car-loan sales in Lebanese lira, as we have introduced a new plan in this currency, 99 percent of our lending portfolio was in US dollars,” she elaborates.
In another area where bankers increasingly started seeking to better serve the Lebanese market, small and medium enterprise clients picked up on the idea that large banks could help them with their specific needs, Bank Audi confirms. “[Besides a] remarkable increase in the sales of the retail banks’ core retail products, starting with the personal loan and followed by the home and car loans, we have witnessed, in the SME banking sector, a high demand [for] products that finance the working capital (operating expenses), followed by [demand for] subsidized loans from the central bank for long-term financing,” explain Eid and Hassan Sabbah, head of SME banking at Bank Audi.
Words from stakeholders in other parts of the financial economy
In addition to commercial banking, with its ever-more diversified retail, small commercial, and corporate offerings, other sectors of the financial economy showed either concrete development or at least promise of future development. From the banking sector’s chambers of wonders—the wealth management and private banking space—come tidings that Lebanese High Net-Worth and Ultra High Net-Worth Individuals (HNWI and UHNWI) found themselves able to lean back comfortably on rich cushions. Leading private bankers in Lebanon who opened their hearts to Executive in fall 2017 assured that wealth deities are exceedingly kind to their clienteles. Wealth management specialists representing Swiss private banking group Julius Baer likewise signaled that their local clients have nothing to fear.
During a visit to Lebanon in early November, Remy Bersier, head of Emerging Markets at Julius Baer, confirmed that the bank, which has had an office in Lebanon since it acquired the Beirut operations of Merrill Lynch, has not seen any unusual behavior or irrational capital-flight impulses from clients here. “We are committed to growing here, and are recruiting. We want to reach a higher level of access to the UHNWI segment,” he says. With a strategic concentration on the three pillars of sustainable profitability, client experience, and reputation, “We have many projects ongoing today in the bank and are really careful to respect regulations. One of the key topics is to bring the bank into the next decade and, hopefully, century. Reputation is not negotiable,” he emphasizes.
Capital markets in 2017 still were as they had been in previous years: underdeveloped to the point of invisibility. But as the FSAP assures and local capital-market wizards confirm, Lebanon’s regulatory Capital Markets Authority (CMA) has not been idle. The FSAP reports said that “Over the past five years, the CMA has built capacity and is now well established as an independent regulatory authority,” and acknowledged that the institution, which is also chaired by BDL Governor Salameh, “has prepared regulations in line with international best practices covering licensing and registration, market conduct, business conduct, securities offerings, listing rules, and collective investment schemes, and has put in place a supervisory program.”
The CMA’s key message to the market in 2017 was confidence, CMA Communications Head Tarek Zebian conveys to Executive. “Today, investors and financial institutions strongly feel the presence of CMA while conducting securities-related business activities. In 2017, CMA formulated, in coordination with experts from the World Bank, a ‘blueprint for market development,’ a document that was shared and consulted upon with all stakeholders of the CMA, including the office of the prime minister, representatives of public institutions, and financial industry professionals. This signaled to the various participants our long-term commitment to shift the capital markets to the forefront of financial activity in Lebanon,” Zebian says, adding that the authority’s measures should ultimately translate into vibrant capital markets which enhance economic growth.
Pointing to progress in the drawn-out saga of attempting to transform the Beirut Stock Exchange (BSE) into a high-performing entity and the vibrant center of Lebanon’s capital markets, Zebian affirms that a cabinet decree issued in August of this year initiated the process of establishing a new entity under the name Beirut Stock Exchange sal, transferring all assets of the “dismantled government-owned Beirut Stock Exchange to the new sal company.” According to him, the new BSE is to be sold within one year.
Among a host of other new measures, in 2017, the CMA signed a memorandum of understanding with Lebanon’s Insurance Control Commission (ICC) at the Ministry of Economy and Trade. “In essence, the MoU clarifies the relationship between both authorities, especially toward investment insurance policies that has dual oversight as a result of securities-linked (unit-linked) products underlining their formation,” Zebian explains. It is expected that CMA and ICC will exercise joint jurisdictional oversight and collaboration in the interests of insurance policyholders and investors in this industry.
The insurers’ lot
The Lebanese insurance sector is engulfed to quite some deGree in a dichotomy that is not all that dissimilar to the contradictory state of the country’s economy. All insurance companies are private sector players. The companies pride themselves in being pioneers of practicing insurance skills in the region. However, no single insurance company has been listed on the BSE, and sector assets historically represent under 10 percent of GDP. Banks regularly outdo insurers in terms of sector-asset growth and, as the FSAP notes, insurance assets stand small when compared with the banking industry.
In the FSAP description, “The ICC is instrumental in maintaining the industry in a generally sound condition,” but “the insurance sector faces structural challenges to its sound development.”
AXA Middle East confirmed that 2017 saw an increase in competitive pressures in the local market, resulting in decreases in premiums. Coupled with cost increases from the expected VAT increase and rising costs for medical care, the company foresees a “reduction of profit or even losses for insurance companies.” According to Reine Kattar, AXA Middle East’s brand, communication, and reputation manager, the company, which is affiliated with the multinational AXA Group, is also witnessing some cost pressures from an increase in regulatory action, a relatively new phenomenon in the Lebanese insurance market. “Governance requirements are increasing, which leads to higher cost in compliance, risk management, and internal audit,” she explains.
New regulatory pressures included, AXA Middle East General Manager Elie Nasnas confirms growth prospects for the insurance industry. “I can see a growth in the insurance sector for the coming years. This can only be offset currently by the lack of tax incentives for life products,” he tells Executive, adding that the incentives for life insurance savings products exist in many countries and motivate owners of small as well as large businesses to buy these insurance programs.
“Also needed today is a unanimous decision by the Ministry of Finance to exclude the costs of taxes related to health and savings insurance policies from the general tax on wages and salaries, which will in turn encourage business owners to invest in such policies. A driving factor which will drastically help the insurance sector would be a policy shift of making some currently optional policies to become mandatory insurance covers. Most notably, these are civil liability for material damages as well as insurances against fire and natural disasters. In the past, these types of policies were seen as optional, but in today’s world they are indispensable to our everyday lives,” he says.
The assessment of insurance as in need of structural reform is also confirmed by Anthony Khawam, deputy CEO of Sécurité Assurance, who tells Executive, “Compared to regional and international standards, our market is overcrowded. There are 52 insurance companies for a $1.5 billion market. This results in fierce competition and lower market standards, and also makes it difficult for the regulator to monitor and stop the misconduct of some players.”
Regarding measures that would accelerate reform in the insurance sector, Khawam identifies the meager capital requirements as a main reason for the market’s over-crowdedness. “It is very important to raise capital requirements and to create subsidized loans that would encourage mergers and acquisitions. These initiatives would consolidate and strengthen the market, and our understanding is that the regulator is rightfully working on both of those fronts,” he says. In his view, the ICC has indeed been responsive and proactive in dealing with market misconducts. “This sent the right message to stakeholders, not to mention that some corrective measures were much needed,” he concludes.
The CMA’s Zebian confirms that the capital-market regulator favors public listings from the insurance sector. He emphasizes, “The CMA seeks to create a sound legal and operational framework that allows for companies of certain maturity and size to take the decision to float their shares. As such, we see a great potential in insurance companies and strongly believe that the insurance market, which is almost 3 percent of GDP, can have strong growth in the future. This is something that investors continue to look for.”
Within the framework of Lebanese political insecurity, it would certainly be frivolous to predict certainty in any part of the financial economy. Growing cohesion in the interaction of banking and wealth management with capital markets and insurance seems the best hope at the end of 2017—provided that the long experience of Lebanese banking sector stability extends through 2020 and beyond.