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A chat with Riad Salameh

The government steers a cautious course amid woes at home and abroad

by Maya Sioufi

This year has been shaping up to be even more bumpy than the last for Lebanon, riddled with domestic unrest, an ongoing conflict in neighboring Syria and global economic uncertainties. The banking sector, accustomed to dealing with turbulent events, has to grapple yet again with grueling headwinds. For more clarity on the events shaping the sector, Executive sat down for a chat with Riad Salameh, the governor of Banque du Liban (BDL), Lebanon’s central bank.

The growth rate of profits in the banking sector dropped significantly in 2011 and continues to drop this year, as reported in the first quarter. What is your interpretation on the recent performance of the sector?

We don’t consider the growth of profits in the banking sector as an indicator for the healthy situation of the sector. We want the banks to make profits and distribute dividends but we don’t want banks to operate like start-up companies. The race to make more profits was not to the advantage of the banking sector worldwide. What’s happening today in the financial community is a result of an obsession with always delivering a growth in profits at the expense of the quality of the banks’ balance sheets.

To maintain the sector’s healthy balance sheets, we are keeping a prudent approach by forbidding banks to go into risky investments and demanding banks take appropriate provisions given the situation they are facing, especially due to the turmoil in the Arab world and also due to what is happening around the Mediterranean [with the European sovereign debt crisis]. We are confident that the banks are healthy in Lebanon because we have run stress tests and they have put aside general provisions for the worst-case scenarios.

What would further deterioration in Syria mean for the banking sector? Would you recommend they exit from the country?

We require the banks  to have the proper capital allocated and the proper provisions taken ahead of time. That’s one of the reasons why you don’t have the same growth in profits [as witnessed in previous years]. The decision to work in Syria or not is a commercial decision that the banks themselves have to take. Banks operating in Syria and banks here [in Lebanon] operating with Syrians have decreased their operations by 40 percent in the past 15 months. Their total credit exposure stood at $4.8 billion 15 months ago and is down to $2.7 billion today.
Do you think Lebanese banks with Syrian affiliates are exposing themselves to reputational risk by having individuals sanctioned by the United States and the European Union as shareholders? [Rami Makhlouf has a stake in Bank Byblos Syria, and Ahmad Nabil Mohammad Rafic Al Kuzbari in Banque Libano-Française's Bank Al Sharq]

It is a legal issue and it is the will of the owners of these shares whether they want to sell them or not. Being a shareholder in a bank, especially since this participation occurred before these personalities were listed on the Office of Foreign Asset Control (OFAC) or other sanctions list, is something you cannot do anything about because you have to rely on existing laws that govern the economic activity and they differ from one country to another. They should not be elected as board members or, if they are board members, they should be asked to leave the board. I believe none of the [Lebanese] banks operating in Syria has on its board anyone listed on the OFAC list or any other sanctions list.

How rigorously have moneychangers been regulated since the Lebanese Canadian Bank (LCB) case? For instance, were the changers that were allegedly connected to drug dealer Ayman Joumaa and Lebanese Canadian Bank thoroughly investigated, such as Hassan Ayash Exchange and Elissa Holding?

On these special issues, we have done our investigation and we have sent files to the General Prosecutor so that they can be investigated according to Lebanese laws. We understand that the General Prosecutor has asked for evidence from the US and so far we haven’t received an answer on these requests because the operations that are considered to be criminal did not take place in Lebanon. They allegedly took place with car dealers in the US and with the sale of cars in Africa. What we have here in Lebanon is funds coming in and out without transactions linked to them. So having this evidence is very important to be able to legally continue the investigation. We issued a circular to not allow exchange houses to conduct third-party operations as banks do. We have strengthened measures by making banks responsible in case such operations went through them. We also requested capital increases and imposed training on exchange houses.

Do you think there is a need for more rigorous enforcement of the Consumer Protection Law as well as greater transparency from the banking sector over loans and other banking fees?

The central bank has created a department to follow up on these issues in terms of proposing circulars and we believe further laws will be welcome. I believe one of the most important issues for us in the coming years is to concentrate on transparency that banks should have with customers, which would touch on real fees, real costs of opening an account and concentrate on the improvement of the quality of people serving customers.

How much will it cost the banks to comply with the upcoming Foreign Account Tax Compliance Act (FATCA)regulation? What will the impact be on banking secrecy in Lebanon? What if other countries follow?

FATCA is not a major issue for the banks in Lebanon. The central bank will ask the banks to respect the FATCA law to preserve their correspondent bank relationships and not to expose these banks to questions from the Internal Revenue Service (IRS) or penalties from the IRS. The central bank will make sure that the banking secrecy law will not be hurt and will take a position to cover implementation of FATCA without breaching our banking secrecy by involving the Special Investigation Committee (SIC) in this issue. If there are questions or reports to be sent concerning people under FATCA law, it can be done through the SIC. It will create some costs for the banks as they will have to produce software and some compliance initiatives but given the small number of accounts of that sort, it won’t be very costly for the banks.

You have recently said that the banking sector has reduced its exposure to the government debt and that the central bank is filling the gap. The banks’ deposits with the central bank are increasing though, and so in the end the exposure has not changed?

We are not concerned with the banking sector’s exposure to government debt because their liquidity is ample and when the situation is normal by Lebanese standards, from a political and security standpoint, we are seeing surpluses on the auctions of treasury bills and on Eurobond offerings with issues oversubscribed by two to three times. Confidence is there, and our objective is to keep interest rates stable in periods of instability. The exposure to the central bank is different from the exposure [of commercial banks] to the government because when banks place their deposits with the central bank, if the deposits are in Lebanese pounds, the central bank is the institution that issues the national currency so there is no risk; if it is in foreign currency, it is being deposited with the central bank outside of Lebanon or with correspondent banks so the liquidity is present and not being used.

You are requesting from banks to raise capital above the requirement of Basel III. Why so? Isn’t this an additional burden on the banks that already face an economically challenging situation?

The requirement of Basel III is 7 percent tier-one capital (measure of a bank’s capital adequacy) and the sector is already compliant. We went over that level and we think it is important for Lebanon to be at higher level so that banks can remain well-accepted worldwide. We set a target of 12 percent by 2015. Between 2015 and 2019, we might demand higher tier one capital. It is not the end of the exercise. We want banks to strengthen their capital and have quality capital. We are also pushing so that the credit will not be affected. We don’t want to see them improve the ratio by decreasing their credit.

How much additional capital will banks have to raise?

It depends on the expansion of their balance sheets, but at present the figure would stand at around $2.5 billion, which they can secure from their profits. We recommend to banks not to distribute more than 25 percent of their profits as dividends. They have other measures they can use such issuing new shares or issuing preferred shares, which would go into the two percent tier-two capital (additional capital of lower financial strength than tier-one). 

With additional costs from wage increases to compliance with regulations and a challenging economic environment, smaller banks are being impacted more severely than larger ones. Do you expect consolidation in the sector? Would you favor it?

We don’t have any merger in view. Our position remains the same. It is up to banks to decide if they want to merge. We are encouraging mergers between big banks and medium or small banks or among medium banks or among small banks, but we reject any attempt of a merger among the first 11 banks.

This article was published as part of a special report in Executive's June 2012 issue

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Maya Sioufi

Maya is a research consultant on Arab youth entrepreneurship and employment. She headed Executive's banking, finance and entrepreneurship sections from 2011 to 2013. Previously, she worked at JP Morgan in London in equity sales for three years. She holds an MSc in Accounting and Finance from the London School of Economics (LSE) and a BA in Economics from the American University of Beirut (AUB).   

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