Keeping lebanese wealth alive

International circumstances exacerbate pressures amidst rays of financial light

The quest of trying to depict the 2018 outlook on investment opportunities from the Lebanese corner reminds in some respects of the almost 20-year old hit comedy on the American mob, Analyze This. As with the Robert de Niro and Billy Crystal pic, any move of international financial markets and any development on the political front might lead to a panic attack. There are double-crossing mobsters hiding in every cabinet and behind every curtain. Plus, everything is complicated.

What makes things especially complicated for local investors is that they are threatened on two sides. To revert from Hollywood movie imagery to the rich lore of seafaring Mediterranean peoples, the Lebanese investors’ perennial odyssey on financial markets in 2018 is passing through the narrows between the mythical monsters, Scylla and Charybdis. To one side towers the global markets scenario of volatility and uncertainty like the six-headed monster, Scylla. On the Charybdis side looms the whirlpool of the local political economy where the forces of economic disintegration are rotating with increasing speed and emanate lightning flashes of gloom and doom.

At the beginning of last month, to mention just one example, the daily fuss of Lebanon’s political un-movers in their exasperating 2018 theater season of third-rate gobbledygook was briefly interrupted by news that the Purchase Managers’ Index (BLOM Lebanon PMI) in July showed its lowest reading since October 2016. Comprised of five components, the PMI’s downtrend according to BLOM signaled that business conditions in Lebanon’s private sector economy deteriorated to a sharper extent at the start of the third quarter in 2018. The bank’s chief economist, Ali Bolbol, commented that the index made for “depressive reading” and called in a published comment for the “urgent formation of a new government and the serious tackling of the dire economic conditions.”

Similarly, Bank Audi observed an accumulation of worrisome symptoms. Officials at the bank confirmed to Executive that the Lebanese economy has been burdened by elevated levels of public debt and a growing current account deficit, while major sectors (real estate, tourism, and construction) were growing at a very slow pace. The rising interest rate environment acted as an additional headwind to economic growth while higher inflation has to some extent eroded the purchasing power of the Lebanese population, they noted. Although the country has been able to weather economic shocks in the past, this particularly lackluster outlook has been well acknowledged by the Lebanese political class, they added.

Global volatility 

Addressing how global clouds are gathering in the vision line of high-net-worth investors, Toufic Awad, general manager at Audi Private Bank, tells Executive that “2018 and 19 are looking to be more heterogeneous” when compared with 2017, in which, according to him, most asset classes showed a “stellar performance.” (Editorial note: due to the seasonal combination of holidays and vacation season, Executive conducted several of the interviews in this article via email).

“Stock markets have moved to a higher volatility regime, while bonds have suffered from rising US yields and exacerbated political risks in Europe. Valuations have improved as stock performance has been slower than earnings growth. If indexes have done their job as market performance ‘averages’, they have, however, been masking rising performance dispersion,” he explains. In this economic climate the primary objective of Audi Private Bank for a risk averse client, according to Awad, is to preserve wealth by shielding the client’s purchasing power from inflationary pressures.

“For such risk profiles, we usually recommend short maturity high quality bonds that would not carry duration risk in a rising-rate environment. We also follow a bond ladder portfolio construction to reduce reinvestment risk. As for other clients that are not typical Private Banking clients, we continue to prone diversification even if it has shown its limits in 2018. An equity growth portion is core in every portfolio; its size would depend on the investor risk profile,” he says, citing gold and/or the Japanese yen as risk management options as they are this summer priced near or below their fair value. According to Awad these are good hedging alternatives when the sizes of a client’s equity position do not permit hedging via options.

“A portion of cash is also strategic in such a market setup, as it now provides some interest yield due to rising rates, and it acts as both portfolio stabilizer and dry powder for arising opportunities,” he adds. In his perspective, a comparison of returns from listed assets to those on deposits in Lebanese lira (LL) would amount to comparing apples and pears. With a view to the increased deposit interest rates that moved up alongside yields in the United States and equivalent yields in emerging markets, Awad says, “We believe a deposit in LL is perfectly compatible with other investments in a global, diversified, liquid portfolio.”

The issue of steering Lebanese wealth and asset management customers through the recent lures of high interest rates for deposits was also perceived as noteworthy by Charles Salem, assistant general manager at Banque Libano-Française (BLF). “Lately, we had to face another problem which is the gradual increase of the interest rate on deposits in both USD and LL, which channeled more money toward deposits and drove clients away from asset and wealth management,” he says.

According to Salem, who heads the Private Banking and Wealth Management Unit at BLF, his team operates under a customer-centric strategy with the top priority of building long-term relationships with BLF’s private banking clientele of high-net-worth and ultra-high-net-worth individuals (HNWIs and UHNWIs), entrepreneurs, and families. “We seek to understand their needs through innovative solutions and expertise, in order to protect and grow their money. In fact, we position ourselves as a trusted and reliable partner who understands the needs of clients from different generations,” he says.

Although the distribution of household savings in Lebanon between the vast majority of households and the top wealth groups is unknown, the clienteles that are likely to be customers of providers such as Audi Private Bank and BLF’s Private Banking and Wealth Management Unit or other institutions in the wealth management space—such as BlomInvest, Bank Saradar, and FFA Private Bank—appear to be exceedingly limited in numbers.

As Audi Private Bank’s Awad reveals, the threshold in disposable wealth that clients should meet in order to benefit from the expert asset management advice and services of private banking is in the solid six figures. “At Audi Private Bank, we usually start at $500,000. Indeed, size matters when we look to achieve diversification across asset classes as the minimum required to invest in some investment vehicles (direct line bonds, active funds, option contract sizes, etc.) is a constraint we need to work around. On another note, our fund-based discretionary mandates can be implemented starting at $250,000,” he explains.

At the top end of the market, banks operating in the lofty sphere populated by HNWIs and UHNWIs are eager to provide asset and wealth management services because they presumably appeal to their profit orientation as much as to their conservatism and desire to be appreciated for their exclusivity. But even banks that relatively a few years ago appeared to prefer catering to large corporate clients and dealing with big-ticket financing needs are of course cognizant of the entire pyramid of incomes and wealth and have improved the targeting of their offerings to specific customer segments.

One small example of this diversification of bank offerings at the largest Lebanese bank is the creation of a dedicated department for small and medium enterprises (SME), which was introduced publicly in August 2016 and presented to customers with an extensive marketing campaign. According to Hassan Sabbah, the head of SME banking at Bank Audi, the business line has seen demand on lending and non-lending services from the unit’s launch onward.

While not disclosing growth rates of either activity over the course of the past two years, he notes in response to Executive that there was eagerness by SME clients to utilize free value-added services along with other non-lending services. “Lending products which witnessed the highest demand since the launch of the business line are short-term facilities for working capital needs. This type of loan is usually required to sustain the business and cover running business expenses such as purchasing goods and raw materials, and in some cases to settle premises’ rent or pay staff salaries,” Sabbah tells Executive.

Lebanese microfinance

Even as the SME market has great importance for stabilization and sustainability of the Lebanese middle class, what appears more interesting from the perspective of vertical expansion of banking services in Lebanon to all population and income strata is progress toward the professionalization of the financial services in the portion of the market that has been internationally pioneered over 40 years and was until the 2000s strongly affiliated with non-governmental organizations: microfinance.

Mayada Baydas is executive general manager of Emkan Finance, an institution that is fully owned by the BankMed Group and focused on micro and small enterprises and provision of microcredits to employees. According to Baydas, Emkan and other microfinance organizations in Lebanon today reach a low-income population group that is positioned above extreme poverty. People in this group would not access traditional commercial banks because of their income situations but also cultural barriers that exist in this population group as well as the Lebanese banks. “The [microfinance] industry established a platform and an outlet that reaches this group of the population. I think we have reached a good percentage [of the Lebanese] but there is definitely still more room. But I can also say that many households would have been in a worse situation if not for the presence of services by the microfinance industry,” Baydas tells Executive.

She explains that the microfinance landscape in Lebanon today comprises three institutions which operate under license and supervision by Banque du Liban, Lebanon’s central bank, and that the industry has in the past ten years made significant progress toward achieving the dual objectives of providing access to microcredit and furthering financial inclusion. In her estimate, the addressable market for microfinance in Lebanon is difficult to quantify but is no less than 500,000 persons of which the microfinance industry caters to more than 200,000.   

Noting the increasing professionalization of financial services to low-income people, Baydas refers to two BDL circulars that were published in August 2018 that she expects will advance the microfinance frameworks and provide new support to the sector. In her view, the Lebanese microfinance industry is today on the doorstep of a next level of development. “I think we are starting another decade during which we need to see how much Lebanon can keep up with the Fintech that is taking over the microfinance market globally. We introduced microfinance to Lebanon 20 years ago and ten years ago it really started growing. Now digital financial services are growing in microfinance and local Fintech startups could take off with the right conducive framework [by the regulator]. People, in my view, have the adaptability to use those services if they are rolled out in the coming years,” Baydas says.

Many signs point to both yet-unmet and latent demand for a wider variety of financial services and wealth generation options in Lebanon. Some of this market potential seems to be crowded out by the market dominance of banking and the interest rates they offer on deposits. Proponents of insurance argue that the middle class can derive greater benefits from wealth creation models offered as life insurance with a variety of savings and advocates of entrepreneurship propose a—very different—niche activity in form of angel investing (see box above).

At the same time, there is still much room to cover in the provision of finance to different strata of Lebanese society. Chairman and general manager of FFA Private Bank, Jean Riachi, notes that investment options that are geared toward HNWIs do not make equal sense for other wealth groups and in the current interest rate environment, owners of average wealth would not necessarily derive huge advantages from investing in local funds that have been designed by some banks for retail customers. “The interest rates are so high on savings accounts that you won’t go very far in improving your returns. It [doesn’t] make a lot of sense in Lebanon,” he says.

Investing in infrastructure

What could be more promising in the current scenario would be to open previously untrodden ways of activating and increasing the wealth of many Lebanese while also contributing to the creation of better infrastructures in the country. Riachi and teams at FFA Private Bank thus are working on a plan for infrastructure investments while also bearing in mind the comatose state of the Beirut Stock Exchange and the absence of a capacious pension system, not to mention pension funds.

Being furthermore mindful that Lebanon has no charted course for the implementation of infrastructure investments envisioned under the frameworks sketched out this spring, such as the Capital Investment Plan (CIP) and the commitments that the government received and made at the CEDRE conference in April, FFA Private Bank is setting its sights on spreading infrastructure investment opportunities through dedicated financing vehicles. “We need to have something in our system that allows—that forces, if we can—projects that are offered for the private sector and include the participation of the public,” Riachi tells Executive.

For now, Riachi says FFA’s plan is focused entirely on qualified investors. “We are preparing a private equity infrastructure fund which is not designed for the public, but we could find a way to have the public co-invest,” he says, while declining to divulge all the details of the concept. What he does disclose is that investment could be in the form of funds or bonds, with a threshold for participation by the public depending on the distribution channel that is chosen. If retail banks participate in the offerings, he says the threshold could be as low as $5,000 or $10,000. “If investors and businessmen are ready to invest, it means that they expect to make a lot of money out of this [financing of infrastructure]. So why should the general public not be able to do so?” Riachi asks rhetorically.   

Given the disequilibria that are proven or suspected to exist in the composition of the Lebanese financial markets and also within the national savings landscape, there have long been arguments to make the Lebanese financial market environment more sustainable by introducing greater diversity.

Technology can be counted on to contribute to this diversity, from digitized savings plans offered by insurers to robo-advisors, which have emerged in the asset management industry over the decade, making their way down the wealth pyramid. (And trust the Lebanese to be in on this. Dubai-based Fintech startup Sarwa, cofounded by two Lebanese, just announced the successful raising of $1.3 million in a funding round that nota bene included funding provided by Middle East Venture Partners).

Thus, under a concept that conjoins mass customization of finance and communal interests, the not-distant future might see Lebanese people—known as equally tech-eager and financially alert— enjoy wealth advisory services in a parallel way as it is the latest digital frenzy in tailoring fashion products. We might just slip into a stretchy wealth services equivalent of a Zozosuit, take a few pictures, state a few preferences on a questionnaire, and get delivery of a vertically integrated wealth advisory package that serves our needs and the needs of our country. However, there is much work still to be done in the changing of cultures to advance from the fractionalized self-perception of Lebanese communities to the self-image of a group of communities that are all dedicated to optimizing national wealth in tandem with accruing individual wealth.    

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