The financial positioning and performance of alpha banks in 2017

The growth of Lebanon’s top lenders

Photo by: Greg Demarque/Executive
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The Alpha Report by Bankdata Financial Services covers 14 banks, each of which have deposits exceeding $2 billion and collectively represent the lion’s share of banking activity—holding 87 percent of the $227 billion in assets at the end of September 2017. Before assessing the performance of Lebanese alpha banks during the first nine months of 2017, it is important to acknowledge the political climate in which they operate.

In November 2017, shortly after the Alpha Report was finalized, Lebanon reeled from the shock resignation of Prime Minister Saad Hariri. Much has transpired in the weeks since. Political and economic influencers universally sought to reassure the Lebanese people and their international partners that the stability of Lebanon will persist, and that its economic integrity will be preserved. The prime minister eventually made his way back home, and retracted his resignation—for now. And as the country entered into December of 2017, the commitments of key political stakeholders have seen positive developments toward stability,  reinforced by the  Lebanese economy’s long history of resilience and endurance.

However, given it is not yet possible to assess the impact and potential repercussions of the year-end political period, the following overview is, thus, Bankdata’s diligent view of banking conditions in the first nine months of 2017—without any speculation as to developments in the fourth quarter of 2017.

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Slow but steady growth

Measured by the consolidated assets of alpha banks, banking activity saw 4.8 percent growth in the first nine months of 2017 to reach $227 billion at the end of September. In terms of human capital and presence on the ground, alpha banks expanded their networks by 14 branches and 707 persons in domestic positions in the first nine months of 2017. With these additions, the 14 banks accounted for 1,202 branches, and a total staff of 31,202 employees at the end of September. It is worth noting that the staff count of employees abroad did not increase, meaning that all additions to the alpha banks’ net employee count were domestic hires.

In continuation of long-term trends in the banking sector, activity growth was driven by customer deposits—whose growth accounted for two thirds of the asset growth in the first nine months of 2017. Customer deposits actually achieved 4 percent growth over the period; noting that alpha banks’ deposit growth was mostly tied to domestic deposits. On a consolidated basis, alpha banks’ domestic deposits rose by 4.6 percent, while foreign deposits grew by 0.7 percent year-to-date. In parallel, the consolidated loan portfolio of the alpha group grew at a slower pace when compared with previous years. As banks found the harsh economic environment restricting their lending opportunities, loan growth was reported at merely 2.6 percent over the nine-month period (compared to 4.7 percent in the first nine months of 2016).

While the bulk of deposit growth was tied to foreign currencies, almost all new loans this year were in Lebanese lira. This development, which occurred in the context of a stagnant FX loan portfolio, was contrary to what was observed last year. Domestic-loan dollarization decreased to a record low of 69.4 percent at the end of September and moved ever closer to the domestic deposit dollarization ratio of 65.4 percent at end of the third quarter. The gap between the two dollarization ratios has been contracting from 7.4 percent at the end of 2016 to 4 percent at end-September 2017. This trend has also been reflective of the impact of the financial engineering operation undertaken in 2016 by Banque du Liban (BDL), Lebanon’s central bank, that increased banks’ liquidity in local currency.

Improved returns

The growth in the alpha banks’ loan portfolio was coupled with a slight retreat in lending quality. The gross doubtful and substandard loans as a percentage of gross loans rose from 6.81 percent in December 2016 to 7.78 percent in September 2017. Net doubtful and substandard loans as a percentage of gross loans likewise rose from 2.43 percent to 3.19 percent over the same period. Nonetheless, while doubtful loans are provisioned to the extent of 71.8 percent by specific provisions, collective provisions were significantly enhanced, reaching an all-time high of 1.71 percent of net loans.

At the profitability level, alpha banks’ net profits from operating activities grew by a mere 3.4 percent over the first nine months (growth was 21.4 percent when adding profits from discontinued activities). It is important to note that the growth in recurrent profits over the first nine months of 2017 saw a real increase above the nominal growth of 3.4 percent when normalizing the profits of the corresponding 2016 period for non-recurrent fees and commissions resulting from BDL’s financial engineering operations. Nominal profit growth was driven by 2.6 percent growth in net interest income, yet offset by a 49.5 percent contraction in net fees and commission income (for the reasons mentioned above), leading to a 6.2 percent contraction in net operating income. Within the context of an 11.1 percent contraction in operating expenses, banks experienced stagnation in operating profits.

With respect to return ratios, Bankdata observed a relative improvement. While a slight increase in the return on average assets from 1.04 percent in the first nine months of 2016 to 1.19 percent in the same period of 2017 was reported, the return on average common equity rose from 12.77 percent to 14.33 percent, though still below the cost of equity of alpha banks. The components of return ratios suggest that spread has contracted by 6 BPS, moving from 1.94 percent to 1.88 percent, coupled with a decline in the ratio of non-interest income to average assets from 1.20 percent to 1.03 percent. All in all, this generated a retreat in the asset utilization rate from 3.14 percent to 2.91 percent.

The unfavorable developments were offset by a noticeable rise in net operating margin from 33.23 percent to 40.96 percent, mainly tied to the drop in credit cost from 8.00 percent to 5.76 percent, while cost to income improved from 49.70 percent to 44.89 percent over the same period. Both the asset utilization ratio, and the credit cost ratio of the corresponding 2016 period were inflated on one side by the non-recurrent revenues and on the other side by the BDL requirement for banks to use their exceptional revenues in one-time extra provisions.

Dany Baz is the general manager of Bankdata.