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BLOMINVEST‘s review of Lebanese banks

BLOMINVEST‘s review of Lebanese banks

by Stephane Abichaker

In June 2008 BLOMINVEST published a review of Lebanese banks as part of its Global Equity Research Report series. The following is a summary of that report.

The Lebanese banking sector has always been at the core of the domestic economy with Lebanese banks playing a major role in the financial recovery of the country and carrying almost all of the latter’s financial intermediation activity.

• Lebanon enjoys high banking penetration rates with a deposits/GDP ratio standing at 2.82x in 2007e compared to 1.15x for the emerging markets. This is mainly due to the continuous inflow of funds from Lebanese expatriates which is driven by two important factors: the support of the international community as proven by the latest Paris III conference, and the strong track record of no default.
• The degree of fragmentation of the banking sector has been decreasing along with a fall in the number of active banks. Currently, 66 banking licenses are active out of which two thirds are Lebanese and 77% are commercial.
• This landscape results from foreign divestments, liquidity surpluses in the GCC countries, local diversification of business lines with an increasing focus on private, investment, and Islamic banking activities, and finally the BDL policy of supporting M&A activity between banks to avoid liquidation costs and to improve the efficiency of the sector as a whole. For instance, since 1997 around 30 banks were acquired or merged with the acquisition of BLC by Fransabank, with July 2007 being the most recent consolidation transaction.
• The 11 largest banks account for nearly 80% of the total sector’s deposits with BLOM and AUDI, the two largest banks, showing clear signs of pulling off the rest of the group due to higher assets, profits and greater geographical diversification.
• Despite immature local capital markets, the Lebanese banks were amongst the first banks in the Arab world to access the international capital markets by issuing GDRs, preferred shares and Eurobonds, reflecting comfortable financing flexibility.
• The major Lebanese banks have been seeking not only local but also international expansion in order to enhance their profitability, diversify their earnings’ sources and assets, increase their product range, and in time of crisis allow the channeling of funds to safer zones. Geographical expansion is also seen as essential for risk diversification.
• Traditionally, Lebanese banks have been mainly family-owned but the need in the last 15 years to raise capital via both the local and the international capital markets has diluted families’ stakes, albeit without affecting significantly their managerial control.
• The main driver of the Lebanese banks’ profits is interest income that arises mainly from inter- bank deposits, allocation of funds into mainly Lebanese sovereign bonds and treasury bills, and customers’ loans. Profitability indicators have been improving in the last few years, although the still limited diversification of income is causing return on assets and return on equity ratios to still lag regional peers. However, regional expansion is expected to promote earnings’ diversification by increasing non-interest income, and reducing the reliance on domestic income in the near future.
• Despite the cost burden that arises from the banks’ expansion strategy, Lebanese banks have managed to control their operating expenses, with BLOM leading in terms of operating and management efficiency.
• Amid the political and economic turmoil following the assassination of PM Rafic Hariri and the July 2006 War, customer deposits, the main source of Lebanese banks’ funding, grew significantly — over the past six years reaching $72 billion as at year-end 2007.
• Lebanese banks remain exposed to the Lebanese sovereign risk as around 25% of the banks’ balance sheet is accounted for by lowly rated government bonds and treasury bills denominated in both USD and LBP (Lebanon is rated B3 by Moody’s and B-1 by S&P). The high risk weighting on these government securities (as a consequence of Basel II regulations) is somehow mitigated by the high yields carried by these government securities and by the strong track record of the government in repaying principal and servicing debt. Moreover, the Central Bank has continuously enjoyed implicit support from GCC governments in maintaining high foreign currency reserve levels, and hence keeping the local currency stable.
• Loans account for a relatively low percentage (22% at end 2007) of the banks’ consolidated balance sheet. This is due to the lack of quality borrowers and to the limited ability of corporates to adequately service debt. However, NPL coverage by loan loss reserves is improving across the sector, with the smaller banks appearing to be in greater difficulty on that front than their larger peers.
• Capital adequacy of banks has improved significantly over the years with consolidated equity for the sector accounting for 7.6% of total assets as at year- end 2007. The larger banks in particular have a solid track record in capital raising within the international capital markets and have had a strong organic capital growth over the last decade due to solid profitability.

Stéphane Abichaker, Nicole-Clémence Khoury, Nicolas Photiades work at the equity & fixed income research unit of BLOMINVEST Bank.

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Stephane Abichaker

Stéphane Abichaker is a partner at CDC Blockchain, a startup working on electronic currency solutions. He is a lecturer at Université Saint Joseph, with 15 years of experience in banking and investment banking.
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Nicole-Clémence Khoury


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Nicolas Photiades


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