Unlike the alpha banks, Lebanon’s smaller banks in the beta (ranked 11th to 20th) and gamma categories (ranked 21st to 30th) are not wholly concerned about growth. Of course, it is an aspiration for them, but not central to their operational strategy. Instead, the more modest banks of Lebanon focus on customizing their bouquet of financial products to target certain client niches.
Jihad Bassil, general manager of Middle East and Africa Bank (MEAB) — ranked 23rd in total assets — is revamping the bank’s strategy to focus on a particular niche market.
“This niche is what we call small and medium clients,” he said, with deposits between $50,000 to $500,000. “We wouldn’t mind having high level or prime clients, but this will not be our main target. We believe [the small and medium] niche is more stable [and] more reliable… than the big names, because the [latter] are subject to competition.”
However, Tarek Khalife, chairman of CreditBank — 19th in total assets — said smaller banks in the country should adopt a more comprehensive strategy. He said not many of the beta banks have succeeded in adopting a “universal approach” to banking, which is necessary since the size of the Lebanese market cannot cater to a niche market strategy.
“You cannot only do private banking or only retail banking; it’s not large enough. You have to have all services [so you can] cater to the needs of your client, because your client requires cross-selling,” said Khalife. “He’s a corporate [client] but needs a car loan or he’s a small to middle market [individual], but he needs a housing loan… You need retail services, commercial lending capabilities and a wide network; you cannot have half of a solution.”
Confidently, the smaller players in this financial game don’t see much of a difference between themselves and the alpha group. In fact, the only difference, they say, is size.
Size doesn’t matter
“The differences between the various groups of banks — alpha, beta and gamma — is only size. We offer practically the same services and products as the alpha banks and they offer the same services and products that we do,” explained Yasser Mortada, general manager and board member at the Federal Bank of Lebanon (FBL).
It seems that none of the smaller banks have a burning desire to be in the top 10. As a member of the gamma group, MEAB’s Bassil said his main target is to join the beta club. He says that being an alpha bank necessitates a consistent strategy to remain focused on staying on top and nothing else. “One day [you] lose control of what you’re doing, just because you want to be an alpha bank and stay at the top.”
He has no desire to be in the alpha group, as the “criteria for alpha banks is not interesting; total assets, total deposits, etc… To make a return on your investment, this is what adds up for me.”
Khalife added that reaching alpha bank status should be the consequence of a clever action plan and nothing else. “Becoming an alpha bank is a result and not an objective in itself. Being big should be the natural result of being successful, and not the other way around.”
He added that naturally, size was a concern for CreditBank. But, after a certain critical mass, one’s attention should shift towards the customer. “After a certain point, size no longer becomes the main parameter that you focus on. You try to focus on customer service, added value to the client, personalized services, etc.”
Lebanese beta and gamma banks take pride in their personalized approach to banking. Mortada outlined FBL’s strategy of being a “private universal bank.”
“This is a contradiction of terms in a sense… The way we look at it at [FBL] is that a regular customer will receive the same kind of services as a high net worth individual,” he said. “You can serve a coke in a can or a nice glass. But obviously, the person receiving the Coke in a nice glass will feel much more appreciated than someone who just receives the can of Coke. The bottom line is they’re both drinking Coke.”
Too much of a good thing
Right now, the Lebanese banking sector is among only a handful in the world with an excess amount of liquidity. At a time when financial markets around the world are pulling all their resources together to create liquid funds, Lebanon has too much and little idea what to do with it.
With no diversity for potential investments, Lebanese banks — of all sizes — struggle to place their liquidity in worthwhile ventures.
“There is too much liquidity, and this is the danger!” warned Bassil.
Similarly, Mortada saw the liquidity surplus as a hurdle.
“To find a place to invest the liquidity, you need medium and long-term projects,” he said. “To have [these] projects you must have political stability. It’s a circle.”
The general manager of Banque BEMO, Samih Saadeh, agreed with his colleagues.
“We are very liquid, it’s a blessing but it’s a very large liability. Placing that liquidity is difficult.” Pondering what banks should do with this overabundance of cash, Saadeh said, “the government does not need it [and] the economy of Lebanon is not capable of absorbing such a huge amount of liquidity. We need to find venues to invest the liquidity in and assets that give us enough return to at least cover costs.”
Mortada added that “liquidity is buying us time to fix our problems [and] time is endless as long as the liquidity keeps coming in.”
Some bankers were worried that as the ripple effects of the global financial crisis begin to make their way to Lebanon, capital inflows to Lebanese banks would slow this year.
Thankfully, this did not happen. “[Remittances] were expected to decrease, and people were saying that 50,000 unemployed Lebanese would come back,” said Bassil. “But incoming money from outside grew this year.”
By the end of 2008, foreign remittances by expatriates totaled $7.7 billion and proved to be a confirmation of the fact that Lebanese expatriates view the country’s banks as safe havens. And as the sector enters into the fourth quarter of 2009, there is little sense that this has changed.
GDP — not debt — is the problem?
Currently, Lebanon’s outstanding debt is expected to stand at nearly $50 billion by the end of the year, according to official estimates. This has always been a major problem for the banking sector as banks forgo the opportunity to invest liquidity in profitable ventures because their balance sheets are weighed down by treasury bills, Eurobonds and certificates of deposit (CDs).
As of March 2009, commercial banks accounted for 56.4 percent of the total debt, while BDL reportedly held 21 percent of the deficit. With interest rates ranging between 8 and 11 percent (depending on the maturity date of the bonds), it is quite favorable for the government to continue borrowing from the domestic banking sector rather than foreign entities.
The smaller banks seem to agree that the alpha banks are the major providers and beneficiaries of government paper.
“Typically, the alpha banks have been benefitting from supporting the public debt. It’s the first five or six banks that are taking part [in lending to the government], not even the whole group of alpha banks,” said Khalife. “When you find banks that have 60 to 80 percent of their balance sheets in treasury bills and CDs — these are banks that have supported the public debt and the currency. They have grown the most and they have benefitted the most.”
Mortada said the reason the size of the national debt is so astounding is because Lebanon’s GDP is stunted.
“The debt level is not high; it’s the GDP that is low,” said Mortada. “The GDP could easily be doubled or tripled in Lebanon and then the level of debt to be serviced would become reasonable.”
Either way, he said the debt in Lebanon is not a problem. “Debt is only bad for you if you cannot service it. If you can service your debt level, then why should you pay it off? You don’t want to be debt free.”
MEAB’s Bassil wholly disagrees. “You don’t give someone money because they need it, you give someone money if they can pay it back; the Lebanese government cannot pay it back,” he argued. “This is not an explanation. The banks are making money out of the debt! It’s a nuclear bomb that will one day explode and it’s a very big problem,” Bassil added.
Khalife explained that if it weren’t for the alpha banks’ capability to support the Lebanese pound and finance the public debt, no one else could have.
“When the central bank and the alpha banks started this long-term relationship, there was no alternative. You had to support the currency; you had to support public spending. Now, if you have other cornerstones of stability — like political stability — then you can focus on [reducing the public debt].”
The arrangement seems to have benefitted both the alpha and the beta banks to some extent.
“You have to say that it’s a whole equation; the alpha banks played a role in supporting the currency and the public debt, [while] we played a better role in catering to the private sector and this has been the driving force behind our growth, our raison d’être,” added Khalife.
However, Saadeh stressed that the national debt should be the last thing on banks’ agendas.
“If we spent the same time we do talking about the debt on increasing productivity, the GDP of the country would soar. Recently, Lebanon’s GDP increased to $33 billion. It could be $50 billion! Debt is not a problem as long as you generate productivity.”
The real problem
Lebanon’s endless political infighting discernably limits investment opportunities for individuals and banks alike. Mortada said that while the central bank has done a great job, the government needs to play its part.
“Now it’s up to the politicians to provide the second half of stability. If they gave us the stability we needed, then I’m sure that our GDP would grow very quickly and the level of debt would not be as heavy as we think it is,” he said.
But as long as political squabbling creates an atmosphere of uncertainty, the liquid state of Lebanese banks is put at risk.
“[People] will always have their assets in liquid form so in the event of a crisis they can transfer all of their assets outside of Lebanon,” said Mortada. “This isn’t bringing any added value to our GDP.”
Khalife concurred, reiterating the need for political calm.
“If you have political security, plus economic stability, you’re going to get more competition and more FDI [Foreign Direct Investment] and this is something we should be hoping for.”
