Francois S. Bassil is chairman and general manager of Byblos Bank. Given how Lebanese banks survived the financial crisis virtually unscathed, Executive presented Bassil with some questions about the Lebanese banking sector and his expectations for the country’s financial future.
- What are your expectations for the Lebanese banking sector in 2010?
One of the key priorities for this year will be to increasingly focus on risk management. The credit crisis has revealed glaring gaps in risk management, as banks around the world learned to their peril, that the underestimation of liquidity created severe systemic risk. Commercial banks in Lebanon have a fiduciary responsibility to conserve capital, safeguard deposits and minimize depositors’ risk.
The crisis has clearly reflected the fact that the size of financial institutions is not the most relevant criteria; some of the largest global commercial and investment banks aggressively expanded their balance sheets at the expense of proper risk management, with ensuing disastrous results.
The larger Lebanese banks are likely to increasingly focus on risk management, internal audit, corporate governance and transparency, rather than on the aggressive expansion of their balance sheets.
Another trend is the cautious resumption of regional expansion. The global crisis led banks to take a “wait-and-see” approach by consolidating their positions and assessing their exposure in the markets where they were already present. This applied to operational expansion as well as to credit portfolios, as banks generally favored liquidity over expanding their balance sheets during that period. But with global and regional conditions stabilizing, and with Lebanese banks emerging largely unscathed from the crisis, banks continued to lend abroad. However, most of them followed a more cautious approach, while resuming their operational expansion in existing markets.
- In 2008, you told Executive that Lebanon had missed several opportunities to improve the investment climate and the business environment in the country, especially in the arena of reducing the public debt. Do you still believe that this is true?
The Lebanese economy has proven that it can compete regionally, but the country has wasted too much time and too many opportunities to implement much needed reforms that would support the economy’s competitiveness and its private sector. It is very important to keep in mind that Lebanon needs to continuously improve its investment climate and business environment, as Arab economies are fiercely competing among each other to attract capital, tourists, foreign direct investment, multi-nationals, technology and talent. A basic condition for the economy to attract capital, tourists and multinationals is long-term political stability and security. Further, the implementation of reforms to improve the business environment and the investment climate would be of great support.
Lebanon still ranks 108th globally and 12th in the region on the Ease of Doing Business [survey], and comes in 89th globally and in 9th in the [Middle East and North Africa] region on the Index of Economic Freedom. This is why the Lebanese banking sector urges authorities to place financial and economic issues as their priority and let political decisions serve these priorities. Further, the economy’s competitiveness can be boosted significantly by reducing the fiscal deficit and the public debt, which are still very high, despite the decline of the size of the debt relative to the size of the economy. Therefore, liberalizing the telecommunications sector and the introduction of competition, privatizing the mobile phone licenses, as well as restructuring Electricité du Liban [Lebanon’s state owned electricity company] are measures that would definitely help reduce the fiscal deficit and the public debt, as well as reduce the cost of doing business, and would help create jobs and attract investments.
- How important is debt reduction for Lebanon’s fiscal health?
The fiscal deficit reached $2.6 billion in the first 11 months of 2009, equivalent to 25 percent of total budget and treasury expenditures. Debt servicing increased by 13 percent year-on-year to $3.4 billion, accounting for 33.2 percent of total expenditures and for 44.2 percent of budgetary spending. It absorbed 44.4 percent of overall revenues and 47 percent of budgetary receipts. As a result, Lebanon’s gross public debt reached $50.5 billion at the end of November 2009, constituting an increase of 7.3 percent from the end of 2008. The public debt-to-[gross domestic product] ratio declined from 180 percent of GDP at the end of 2006 to about 151 percent of GDP at the end of 2009 – still one of the highest such ratios in the world. But this decline is deceiving, as it was caused by the growth in the GDP rather than by any decline in the nominal size of the debt. So the public finance vulnerabilities remain and need to be addressed by effectively reducing the government’s borrowing needs.
Ratings agencies upgraded the country’s sovereign ratings in 2009, when many sovereigns in emerging markets were being downgraded. That was because Lebanon’s public finances had, ov-er recent years, shown themselves to be remarkably resistant to serious political and economic shocks.
However, this is hardly comforting, as the rating agencies have converged to warn that the authorities need to implement structural reforms to reduce the fiscal deficit and the public debt. This is another way to say that the authorities have successfully managed the public debt but have failed so far to reduce its size. A decline in the government’s borrowing needs would encourage rating agencies to upgrade Lebanon’s ratings. In turn, this would help reduce interest rates on future government borrowing. When this happens, interest rates in the economy would start to decline substantially, therefore reducing the cost of funds on banks and businesses. So reducing the fiscal deficit is very important, as it constitutes the first step toward reducing interest rates and the cost of funds for the private sector in Lebanon.
- What will your goals be for 2010 and how will global operating conditions differ from those of 2009?
The primary objective of Byblos Bank has always been and will always be to maintain the confidence of our depositors, clients, shareholders and other stakeholders. The New Year has started with steps in this direction. Indeed, Byblos Bank’s board of directors recently approved a $250 million capital increase to be implemented before the end of June. In parallel, the International Finance Corporation (IFC) [the private sector arm of the World Bank], agreed to invest $100 million in Byblos Bank and will have an 8 percent stake. The capital increase and IFC’s participation fall within Byblos Bank’s strategy of gradual expansion in emerging markets. Byblos Bank’s objective is to diversify its assets and sources of income by expanding in selective emerging markets with strong economic growth and low levels of bank penetration. It aims to have a minimum of 40 percent of its assets and income from international activities in the coming few years.
Currently, the Byblos Bank Group operates in Lebanon, Syria, Iraq, the United Arab Emirates, Sudan, Nigeria and Armenia, as well as in Belgium, France, the United Kingdom and Cyprus, and has one of the largest corresponding banking networks in the sector.
The substantial participation of the IFC in the bank’s capital demonstrates that Lebanese institutions with sound and conservative management, and with a clear vision, remain attractive to international institutional investors.
It is the largest investment by the IFC in the Lebanese economy and one of the largest IFC investments in the Arab banking sector. It also reflects the increased focus of investors on transparency, governance, risk management and internal controls, in addition to high solvency and profitability ratios.
