There are perhaps two defining features of the Lebanese banking system in the last six years. The first, more recent feature, is its emergence as a safe haven amid the global financial crisis that has enabled Lebanese banks to benefit from capital inflows seeking safer and better returns, increasing assets relative to last year by 17 percent to more than $105 billion. The second, relatively more distant feature, is the expansion of Lebanese banks into regional and neighboring countries. Currently, there are 11 Lebanese banks with more than 220 foreign banking units spread over a large swath of countries in the Middle East, Africa and Europe.
Lebanese banks’ overseas presence is unsurprising. The major banks have always had a presence in Europe — primarily France, Switzerland, Belgium and the United Kingdom — to serve Lebanese and Arab expatriates in niche services, like private banking and trade finance, but that has not developed strategically enough to become an important part of their revenues and balance sheet. What is eye-catching is their recent move into Arab and regional markets. But even this should not be unexpected — Lebanese banks have always known how to handle foreign competition, having operated in an open financial system since the country’s inception and competed successfully in their domestic market against much larger and stronger foreign banks. In addition, the war years and their aftermath taught bank management how to operate, and even excel, under conditions of risk and uncertainty. Regional countries also share with Lebanon a common language, culture and a rich network of relationships that make the replication of banking services tried and perfected at home easy to replicate abroad.
The spurs of expansion
More specifically, we can look at the foreign expansion of Lebanese banks in terms of push and pull factors. On the push side, factors relate to the increasing saturation of Lebanon’s domestic market — currently containing 53 banks, nine of them foreign — and banks’ consequent strategy of reducing dependence on a comparatively small and highly competitive market. Also important is the banks’ desire to spread risk, diversify revenue sources and marshal liquidity away from further exposure to Lebanese treasury bills and Eurobonds. On the pull side, factors that stand out are the reforms that have opened up the banking sector to foreign competition in countries like Syria, Algeria and Saudi Arabia, as well as the expected growth potential of regional banking markets and economies.
But if regional expansion was to be expected as the next natural step for the major Lebanese banks, it was not without its challenges. The strategy was not uniform; each expansion had a focus and a form of its own, depending on the characteristics of the target market. Diversifying into the “virgin” and un-rated markets of Syria, Iraq, Algeria and Sudan is different than diversifying into the more developed markets of Egypt and Jordan, and even more so regarding the sophisticated Gulf Cooperation Council markets. This requires the spread of specialized and diversified product services: focusing more on retail and small business in the Levant and Arab African countries, and more on corporate, private and investment services in the GCC. A related challenge is that the form and focus a bank takes overseas depends on the country’s regulations and licensing rules. A case in point is BLOM Bank’s experience in Egypt and Saudi Arabia. Not granted a license to operate in Egypt, BLOM acquired an existing bank in 2005, which proved very successful, having grown under BLOM Bank Egypt from eight to 24 branches, earning more than $20 million in profits in 2008. In Saudi Arabia, BLOM had to establish in 2009 an investment bank, BLOMINVEST S.A., since only the Capital Market Authority gives licenses for investment banks.
The major Lebanese banks’ foreign expansion and geographical diversification of revenues have been very fruitful. They can now safely depend on 25 to 30 percent of their accounts originating in foreign and regional markets — in terms of either assets, deposits, capital or income. This is no easy feat, since in most cases expanding banks under-perform in foreign operations due to the absence of “home-field advantage.” Success outside has also been facilitated by the central bank allowing the Lebanese banks to book loans domestically on foreign exposures, something that can be especially productive now since banks can extend more foreign loans from their rich and expanding domestic deposit base. Also helpful is the increase in business emanating from enhanced Arab economic integration, not only as it relates to expatriates and remittances flows but, also to intra-Arab trade and capital flows (more than $70 million for the former and $34 billion of foreign direct investment for the latter). In turn, success will strengthen the position of the expanding banks in their home market, enabling them to better withstand the competition and the lower intermediation margins. If success sees these banks have more than 50 percent of their consolidated revenue and balance sheet emanating from outside, then they can have their ratings exceed the Lebanese sovereign ceiling of ‘B’.
Lastly, what next for the major Lebanese banks’ regional expansion? They are now consolidating existing foreign expansions and widening the coverage and the quality of their product services. They are also waiting to move into other Arab countries, especially those in the Gulf that are yet to open their financial system to foreign and Arab investors.
Saad Azhari is chairman and general manager of BLOM Bank
