Buoyed by banks

Banking sector health check

Illustration by: Ivan Debs

The relationship between the Lebanese economy and its banks is not quite as simple as the numbers suggest. Banking aggregates are improving every year. But the economy in Lebanon cannot be assumed to be sturdy just because the banking sector is jogging on and on. There are far too many risks and alarm signals on the macro level. To name a few beyond the often-cited debt to GDP ratio (now somewhere above 150 percent), seemingly perennial current account deficits (nearly 20 percent in 2016 according to World Bank Group data), and the deficit to GDP (last above 8 percent), the burdens of inequality to society keep increasing—there are weaknesses in factor productivity, poor capital stock formation, lack of competitiveness of manufacturers, an anemic middle class, and arguably not enough energy in the entrepreneurship ecosystem and knowledge economy.

This only can serve to emphasize that banking can supply financial nourishment that a society needs to solve its economic problems—but cannot on its own cure an economy. A society’s economic health is unachievable without banking sector health. When viewed from this perspective, it is more than a simple comfort that banking in Lebanon is still doing astoundingly well. But can one assume that the sector is of overall convincing health, especially when considering the degradation of the regional environment?

Freddy Baz, vice-chairman and group strategy director of Bank Audi, the largest bank in Lebanon by assets, views the health of local banking in context of an economic environment that is marked by tightening conditions, both nationally and regionally. He tells Executive, “As to the health of the banking sector, the quantity effect and the price effect have obviously impacted the bottom lines and internal capital generation of banks because of these deteriorating macro conditions. This is the case in the region as a whole, where one could see decelerating inflows affecting the foreign positions of countries and domestic liquidity. It is true that banks in Lebanon are today facing more challenging macro conditions, but not to the detriment of their asset quality and liquidity, which are still among the best in the region.”

Baz acknowledges that the inflows to Lebanon are down in absolute terms, but “not dramatically so.” According to him, when seen in relative terms, that is when comparing the share of inflows that are attracted to Lebanon with the rest of the Middle East and North Africa (MENA), Lebanon’s slice of the inflow pie was about 15 percent in the past two years. This was down from a previous peak share of 18-19 percent but still a sign that the country in terms of inflows is boxing far above its weight in GDP where the national contribution to consolidated regional GDP is 1.5 percent.

Saad Azhari, chairman and general manager of BLOM Bank, points to the existence of growth and positive profit performance reported by top banks for the first quarter of 2018 despite having borne the impact of increased tax burdens. “I think that the health of the banking sector, even with the difficult environment, is still good. We are witnessing reasonable growth of deposits. The situation in Lebanon is one of challenges, but the banking sector is still in a good shape,” Azhari tells Executive.

According to Alain Wanna, deputy general manager and head of group financial markets and financial institutions at Byblos Bank, the first quarter in 2018 was satisfactory for the sector. “The top four banks, by their published figures, were able to achieve stable profits or small increases, which is very acceptable if we consider that it was after the introduction of new taxes with the involvement of double taxation. Parliamentary elections are behind us, and they were conducted smoothly, CEDRE finished and results were very good, so if the new government is formed quickly, and we have the implementation of reforms that the [previous] government promised, we can expect that acceptable deposit growth will be maintained in 2018,” he says.

Also for Sami Abou Jamous, chief strategy and planning officer of Saradar Bank—the latest entity to ascend to the Alpha group of banks in Lebanon—the good run of Lebanese banking will continue despite turning more uphill. “The banking sector in Lebanon has been resilient and will hopefully continue to be resilient since banks are strongly capitalized. As we at Bank Saradar see it, the pace of this growth will be slower, competition will intensify, and costs driven by mounting regulatory requirements will increase—hence squeezing margins for banks in the years ahead. However, there will continue to be growth. All this means that we [as banks] have to start operating differently, hence our differentiation and our using of digital means to optimize cost,” Abou Jamous says.

Bankable health and harmony

When it comes to preservation and improvement of individual health, the importance of lifestyle choices and influences from the living environment cannot be overestimated. With smoking, drinking, poor diets, and weak control of stress factors, health professionals see the presence of four factors responsible for the development of health problems.

There are some, who in this figurative sense, would regard Lebanese banks as having long been addicted to junk food diets, due to banks’ over-reliance on a single “nutrient group” for fueling their activities—namely the financial food group of treasury bills and sovereign Eurobonds. At present, however, there are added possible detriments to the Lebanese banking sector that must be considered, from taxation pressures to stress-inducing uncertainties over the national outlook. Practically all of these possible impediments to the health of the banking sector are related to political developments, if not in Lebanon, then in the region and world. 

This exposure to political influences on various levels increases the value of having a reliable political outlook in Lebanon. The experience of having had successful elections is a good base, Baz notes. The important issue in his view was not the voting outcome of the elections but the process itself. “Going back to the democratic process is something that is positive. The conclusion of the electoral process was needed by itself and is a reflection of an improvement in the political governance process in the country,” he says.

For Azhari, (who spoke to Executive on the eve of the parliamentary elections), a fast formation of a new government would send a very positive signal to the economy and the banking sector. “The sooner a new government will be formed and the sooner that the government will be able to benefit from the CEDRE package, the better for the overall economy. I was positively surprised by the success of CEDRE as I wasn’t expecting that they would be able to reach what is effectively $11 billion of subsidized loans. [This amount] was beyond my expectations and when disbursed over the next five years is really a big number. I think the government’s priority should be to [do everything to] benefit from those loans,” he advises.

While all bankers asked by Executive about the issue of the government formation said that speedy progress to a new Council of Ministers would be highly welcome and provide encouragement to the banking sector, Baz emphasizes that it should not be interpreted as a detriment to the next government’s effectiveness if negotiations over it were to be marred by laborious and time-consuming elements of the type that often characterize processes in Lebanese politics, adding that he was hedging for this risk.

Equally, he says, it will be more important for the government to demonstrate its collective awareness of the nation’s existential needs for structural reforms—reform of the tax system, reduction of waste in the public sector, combating corruption, expanding provision of efficient public utilities, and the creation of better social buffers in areas such as education and health. Agreements among the government’s constituents would count for much more than the government achieving contentious numerical targets such as the exact implementation of an annual deficit reduction by precisely one point. “In top-down analysis we are not driven by figures and numbers—we are bankers and we are managing very large institutions with risk cultures that go beyond what exist in other business. One can question the 1 percent annual reduction in deficit that has been proclaimed but in my opinion this is a false debate. The right debate is to be conscious as Parliament and cabinet about the urgency of reducing the deficit,” Baz says.

For Wanna, an accurate understanding of the banking sector’s health prospects has to include a perception of risks and outlooks for banks. “If you want to look at the main risks, I can summarize these as the mismatching in the balance sheets of the Lebanese banking sector, the level of liquidity in the sector, sovereign exposure, and the quality of the loan portfolio,” he explains. “Going forward, I think that consolidation in the banking sector will, in the short to medium term, be one of the major drivers of growth in the sector. To merge with larger banks will be the only way out of their situation for smaller banks with limited capital and limited ability to introduce new technology or [those] who face problems to even finding a correspondent bank for their dealings with international markets and who also have to invest in compliance and other key areas. It is my view that it is better for smaller banks, and for the country, if they merge with larger banks,” he says.

Digital body builders

The latest movement in the international industry is the rise of digital. There is some chance that banks of the next generation might be unrecognizable to banking customers of today. But while it is actually quite likely this does not negate the possibility that it will be an autobahn to perdition if banks ignore or underestimate the digital future.

Awareness of the importance of digital offerings for banks is arguable near universal, if one goes by their rhetoric and marketing efforts in pushing digital services. Digital native banks cannot at present be established in Lebanon and it is likely that consumers will still be able to recognize a bank when they see one in 10 or 20 years. Still, it is of interest to see that a bank now talks about the digital over the physical as Saradar Bank’s Chief Strategy Officer Sami Abou Jamous tells Executive when explaining why the bank is more likely to keep its network small and is working to create a “tailor-made hybrid digital bank.”

Beyond the political risks to banking sector health and risks related to the Lebanese market regardless of any political factors, keeping the sector healthy will require countless other considerations that would go beyond what can be addressed in this story.

Thomas Schellen

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

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