The growth in profitability of Lebanon’s banks continues to be stunted by slower economic progress not only in Lebanon but also globally, as well as turmoil in neighboring Syria and increased international regulation. Executive sat down with Dr Joseph Torbey, the president of the Association of Banks in Lebanon (ABL) to discuss these issues in the banking sector.
With growth in the profitability of the Lebanese banking sector slowing, what are your expectations for profits in the sector going forward?
I expect profits to be at the same level as last year. There is drop in the growth of profits because the economy is moving slowly and the environment is politically challenging but the banking sector is still in good shape. I expect 8 percent growth in the deposit base this year and, so far, we are in line with this expectation.
With a slowing domestic economy, is competition among local banks increasing? Should smaller banks consolidate to survive?
For the top 11 banks in Lebanon, the central bank has a policy which does not allow them to merge among each other, as banks should not be “too big to fail” because if they fail, they can threaten the stability of the [economic] system. There is always the possibility for larger banks to acquire smaller and medium sized banks. I don’t expect any [merger or acquisition] operation this year but it is always a possibility.
When it comes to Syria, different banks are adopting different measures. As president of the ABL, what is your recommendation for the banking sector in terms of dealing with Syria?
We are following all international rules [and regulations] and we are not taking risks to evade these rules.
How about the Foreign Account Tax Compliance Act (FATCA)? What impact will this new law have on the banking sector?
The number of Lebanese with a double citizenship is not big and so not many customers will be impacted, but it will be a big burden on banks because they need systems and software. Many banks will avoid American customers because it is really a big cost to banks to operate a system dedicated to giving specific treatment to US citizens different from treatment of all the customers of the bank. We will be asking our American customers to cooperate with the US government and disclose what is being asked of them. Our decision as a sector is to cooperate with FATCA.
Several bankers have also voiced their concern on the exposure of the sector to the government debt. Should banks reduce their funding to the sovereign?
The sovereign risk is under control and there is an improvement in the ratio of public debt-to-gross domestic product. We don’t have a big worry over it. We are putting pressure on the government to implement reforms but reform is not an action taken in one day. It is a behavior and some reforms need the participation of the Parliament and a proper political environment. The government is under geo-strategic pressure now, more than the pressure to perform economic and financial reform, but in the end, the government will be obliged to implement reforms.
Regarding the wage increases imposed by the government, how significant has been the impact on the banking sector?
The banking sector has more than 21,000 employees so our costs are really high. I don’t have actual figures. The banking sector was successful in absorbing the shock of the increase but other economic sectors have difficulty in complying with the wage increase as it comes at a difficult time when the economy is slowing, the regional situation is bad and the international situation is not in good shape either.
With the cost of doing business increasing, where will the opportunities for growth of the banking sector come from going forward?
A big number of banks are operating worldwide and they are following their customers, financing them in Europe, Africa and Latin America. Our expansion is not based only on opening branches and subsidiaries abroad but also in following customers.
This article was published as part of a special report in Executive's June 2012 issue