Pushing for consolidation

The BDL has played a vital role in the consolidation of Lebanon

The Banque du Liban (BDL), through its Banking Control Commission (BCC) has so far done a good job in ensuring that the Lebanese banking sector remains stable and sound, proving to be an able, proactive regulator that has come to the rescue and support of the banking sector whenever needed.

For the record, the BCC’s main responsibility is that of supervising domestic commercial banks, branches of foreign banks, foreign representative offices of banks, and financial institutions and brokerage firms in Lebanon. By making sure that the institutions implement the relevant articles of the Code of Money and Commerce (CMC), the BCC has the capacity to make a judgment and recommend whether particular institutions need rescuing, restructuring or even consolidation. The latter is a process that began in July 1997 when Banque Audi broke the deadlock and bought Crédit Commercial du Moyen Orient. In the same year Byblos Bank bought Banque Beyrouth pour le Commerce.

The BDL and the BCC have always been keen for the Lebanese banking sector to contract down to an optimum size (a total exceeding 83 banks in the mid 1990s for a small size country such as Lebanon was clearly too much). It is estimated that around 65% of the banks in Lebanon have total assets not exceeding $500 million individually, while the ten largest banks in the country control around 70% of the sector’s total assets, roughly $50 billion. Since the first merger/acquisitions, many other deals, some out of sound economic judgment, others out of necessity, followed. Inaash Bank, Universal Bank and Bank Al-Madina, had reached a point where a rescue was needed.

In such situations, the BDL stepped in, either as an administrator, hence taking over the management of the bank (e.g. the Banque Libanaise pour le Commerce case), or as an intermediate between a white knight (typically a larger and healthier bank, willing to expand its franchise further through external acquisitions) and the troubled bank in question. Such was the example of Inaash Bank, which was acquired by the Lebanese operation of Société Générale. The latter was provided with a “soft loan,” which assisted the acquisition funding, and was allowed a generous period for goodwill write-off.

It is worth noting however, that the BDL’s policy of granting soft loans to facilitate acquisitions of banks in difficulty has abated in recent years and, according to specialized bank analysts from international research institutes and securities firms, the generous policy of soft loans was said to encourage mediocrity and malpractice among the smaller banks, who felt they could sit back, safe in the knowledge that if things got sticky, the BDL come to the rescue with a plan that would not only preserve depositors and smoothly integrate the failed bank into a bigger and sounder group, but also save jobs that should not have existed in the first place.

The process of consolidation is being progressively more favored by BDL, as most of the country’s smaller banks are increasingly facing competition from their larger peers and are unable to invest in technology, human resources and product development. These banks are also barely capable of developing into niche players and will mostly not be ready for the forthcoming Basel II Capital Accord, which is due to be implemented world-wide in about three to five years’ time.

The Basel II Accord, which correlates capital with the underlying risk profile of the bank, is closely monitored by the BDL and the BCC, which have both shown concern as to the ability of certain banks to understand it, let alone implement it. Even the larger banks remain small by international standards and will inevitably look towards consolidation if their ambitions to become regional or international players, and to successfully implement Basel II.

BDL has so far facilitated the consolidation process with financial incentives (soft loans), and allowed larger banks to acquire and merge with smaller banks. BDL’s support in this policy has allowed the bigger banks to accelerate growth, extract more synergy savings, achieve higher economies of scale and leverage their non-financial resources. However, with the exception of the recent Audi-Saradar merger/acquisition, there has been no consolidation among the larger banks. This has so far not been particularly encouraged by the BDL, which still regards the elimination of smaller banks through systematic acquisition by larger ones, as a priority.

This policy has paid off. The total number of banks has been reduced from around 66 banks in 1999 to 54 banks at the end of 2002. However, the BDL should see the consolidation of the larger tier of domestic banks as a way to accelerate the consolidation process, as a larger and better equipped institution, such as the one resulting from the Audi-Saradar venture, should be in a better position to acquire the smaller banks, and hence reduce the total number of banking institutions in the country even further.

A rapid and strong consolidation momentum should produce a more efficient banking system, which would be more competitive on a regional basis, more aware of the latest international developments, and less vulnerable to external economic crises. Nevertheless, the BDL and the BCC should make it clear to the sector that a smaller number of large banks does not necessarily mean less credit risk, and that institutionalization should be the key for improved creditworthiness. The BDL is quite capable of handling a consolidation process, as it has the know-how, experience and tools to achieve and facilitate it, but it should step up its “education” campaigns in the themes of proper corporate governance, institutionalization and efficient banking management.

Meanwhile, any post-merger period is crucial for the BDL and the BCC, which have to make sure that the newly merged entity is capable of sustaining its market share, and there is compatibility of culture and management time allocated to the acquisition/merger. The “laissez-faire” attitude of the BDL should perhaps be tightened a little bit to include the continuous advisory of bank boards and executive management committees on how to conduct proper commercial and, in some cases, universal banking work.

The BCC has also encouraged the consolidation of foreign operations of some Lebanese banks (e.g. Audi, Byblos, Saradar, BLOM, etc.) with their domestic sister companies. Foreign branches or sister companies of local banks have been quite helpful in the past decade, as they have at one point been a safe haven in case of social unrest, and provided profits and assets in foreign currency. These foreign operations would also become an immediate destination for deposits fleeing Lebanon in the case a severe local economic crisis or geopolitical instability was to become too unbearable. In such an event, the outflow of funds from Lebanon would be minimized.

Elsewhere, larger Lebanese banks have to start thinking about acquiring or merging with foreign banks in other countries, whether regionally or in other geographical locations. The strengthening of a foreign presence, which would ultimately lead to overseas assets and profits overtaking domestic ones, would allow Lebanese banks to have not only an international outlook and image, but also to pierce the Lebanese sovereign constraint. The BDL therefore, should start developing new regulations that would facilitate such internationalization, by allowing the able banks to start participating in some cherry picked foreign markets. The recent rule, whereby local banks are to be allowed to invest, up to a certain extent of capital, in bonds issued by foreign entities, provided that these bonds are rated BBB- and above, is a step in the right direction.

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