With the brunt of the financial crisis bested by the end of 2008, all Lebanon had to fear was the aftershocks of everyone else’s financial earthquake.
Lebanese bankers dodged the bullet of the sub-prime fallout and, under strict regulation from the Central Bank of Lebanon, avoided the structured products and derivatives that melted balance sheets all over the globe. But, in January of 2009, the worry was that lowered wages and layoffs in the Gulf and Europe would hurt the remittances and capital inflows on which Lebanon’s banks depend.
“When we started the year, the whole world was speaking about the effect of the collapse of different investment banks and the collapse of the markets that happened at the end of 2008, and the effect they would have on the negative growth that was happening in the world,” said Saad Azhari, general manager of BLOM Bank. “In Lebanon there was talk about how many Lebanese were going to be coming back to Lebanon, how the remittances were going to be less compared to years before. The fears did not materialize.”
Capital inflows have been healthy and deposits surprisingly robust for the first nine months of 2009. Cash flowed into Lebanon seemingly unabated this year, despite the fears of bankers and economists. According to Bank Audi, capital inflows reached $14.38 billion for the first nine months of the year; a 25.9 percent year-on-year increase.
This saw total bank assets climb to $109.9 billion at the end of September, a 16.6 percent increase over the same period last year, according to the Association of Banks in Lebanon (ABL).
Many see this trend as a vote of confidence in Lebanese banking.
“The money that came was from Lebanese,” said Azhari. “Those Lebanese used to believe that if they put part of their money in the Gulf or in Europe or elsewhere, it was security for them…because Lebanon was unstable. Now those Lebanese saw that…Lebanese banks are very stable and resilient. [The banks] gained their confidence and they moved their money or they opened new accounts to put their money here.”
On top of capital inflows, the balance of payments’ surplus reached a record high of $4.84 billion for the first nine months, already higher than the full year 2008; a feat that Makram Sader, secretary general of the ABL said is not only due to the restrictive policies of the central bank.
“It is not only that we are under strict prudential rules on behalf the central bank and the banking control commission,” he said. “Lebanese banks have been conservative in nature, they are known for their conservatism and this is why they tend to maintain high liquidity. They don’t engage in excessive leverage. They are all…deposit-rich banks, where the ratio of deposits to total liabilities is 82 percent, which is one of the highest ratios in the world.”
Still on planet earth
Even with the remarkable performance of Lebanese banks this year and despite statements to the contrary from the industry’s top experts, the banks have seen minor effects from the crisis.
“Where it hit us was more at the level of operating conditions, than at the level of business growth,” said Freddie Baz, chief financial officer and strategy director at Bank Audi. “Because we are operating in a dollarized economy and we have significant foreign currency deposits, we had to keep at all times, by all means, an ample liquidity in foreign currency. This is a major business parameter.”
Lebanese banks also felt the devaluation of the dollar acutely at the beginning of 2009 and took action to counter its effects.
“We were hit by the drastic decrease in the dollar’s reference rates, which reached close to zero,” said Baz. “So we got an important hit on the yield of our primary liquidity in foreign currency. For the whole industry, I think we suffered a little bit less than $1 billion of forgone income this year, due to the drastic decrease in the London Interbank Offered Rate (LIBOR), which affected the yield on the primary liquidity of United States dollars deposited with corresponding foreign banks abroad.”
The banks faced this problem with cost-cutting measures, “which made us look similar to banks operating in the environments under stress, at a time when the Lebanese environment was doing well,” said Baz.
The dollar rallied somewhat, and the cost-cutting measures were successful enough to put the banks back on track for the rest of 2009.
As a further effect of the crisis, Lebanese banks naturally saw a decrease in return ratios, with a 0.61 percent year-on-year decrease in returns on equity and a 0.07 percent decrease in returns on average assets, fitting with the global trend of narrowing returns due to the crisis.
Banks’ deposits and credits in LL billions
Treasury bill yields
Any growth is good growth
The detractors of shrinking returns and expensive liquidity led to only modest growth in profits for 2009, explained Walid Raphael, deputy general manager of Banque Libano-Francaise (BLF).
“What is happening is that it’s much more difficult to grow the profits of a bank, and the reason behind it is the fact that we have attracted this liquidity; it costs a lot of money but it’s not easy to use it,” he explained. “Every dollar in profit that came into the balance sheet was nearly a loss because [it was replaced] by [interest paid on] deposits. The spread is a loss. This is why it was very difficult to maintain the same growth in profitability this year.”
Profits for Alpha banks were up by 9.2 percent for the first nine months of the year, reporting aggregate profits of $912.8 million: a definite decrease from the 44.6 percent growth reported in the first nine months of 2008.
Lebanon’s top five banks saw varying levels of profit growth this year ranging from 3.5 percent growth to 21.3 percent growth in net profits. Byblos Bank was the leader for the first nine months of 2009 with 21.34 percent growth in net profits, totaling $95.95 million. Bank Audi, the leader in the amount of net profit, saw a 17.8 percent growth, bringing the bank’s net profits to $212.75 million. BLOM Bank posted net profits of $205 million, a 3.5 percent year-on-year growth. BankMed reported 8.6 percent growth in profits amounting to $76.5 million, and Fransabank saw 12.5 percent growth for $74.8 million.
“In effect, the mere fact that Alpha banks attained positive growth in profitability in such turbulent financial times is yet another indicator that Lebanese banks have insulated themselves from the negative repercussions of the crisis,” said Bank Audi’s Lebanon Weekly monitor.
But the moderate growth in profits, despite healthy deposits, has raised questions as to the priorities of Lebanon’s bankers.
“I think banks have been focusing too much on growing their balance sheets and less on profitability. If they decided to look more at their profitability, they have the means to increase their spreads and make more money,” said Raphael.
According to Baz, this trend is the will of a socially conscious sector.
“We are bottom-line driven, but ultimately we are not driven only by profitability to the detriment of the intermediation function we have to ensure in our market, in order to promote economic growth that will improve standard of living and welfare,” he said.
Still, BLF’s Raphael believes that the instinct to encourage deposits and maintain liquidity ratios may be walked back due to international market pressure.
“I think the markets will push us to do something about it,” said Raphael. “If in the second half of 2010 you start seeing an increase of rates by the [US Federal Reserve], we will start making more money on our liquidity.”
With lessening returns and expensive deposits, non-interest income — meaning commission fees and capital markets income — is becoming an increasingly important contributor to bank profits.
This year, banks saw a 21.9 percent increase in non-interest income and just 6.4 percent growth in interest income, according to Bank Audi. The increase in non-interest income is the result of both an overall increase in banking activity and the physical growth of the banks.
At the end of September, Lebanese banks had a total of 873 branches, 40 of which opened in 2009. Employment in the banking sector increased by 8.8 percent since 2008. At end-September, Lebanon’s banks employed 19,842 people.
A new era
Despite the success of 2009, some of the industries’ leaders hesitate to make predictions for 2010.
“Making predictions in Lebanon is a nearly impossible task,” said Raphael. But this year, many bankers have felt the shift in both the consistency and international prowess of the Lebanese banking industry.
Though no one expects the landslide growth in capital inflows of 2009 to come around twice, there is confidence in the diaspora that remittances will be maintained next year, especially with the increasing likelihood of a recovery of Gulf economies.
An active expatriate community, regional expansion and solid assets, as well as international recognition for impressively weathering the global financial storm, have seen talks begin regarding a new global position for Lebanon’s banks.
“Lebanon is at the eve today to become what it never was: a real financial center,” said Baz. “[Even] in the early 1970s, when [Lebanon] used to be considered the Switzerland of the Middle East, it was only an important banking center. Lebanon was never a regional banking center.”
He further predicted that Lebanon could become a true “banking platform with an important capacity to attract foreign money and to redeploy this money into foreign uses. Beirut probably is getting today as close as it ever has to this definition of a real financial platform, a real financial center.”
As shown by the sly smiles on the faces of Lebanon’s top bankers at the Union of Arab Banks’ annual conference in Beirut in November, despite the worries of its Arab brothers, Lebanon is poised to wield it’s regained international reputation for prudence and reliability, and enter a new era for Lebanese Banks.
