Expect more sparkling wine in plastic cups than champagne in crystal flutes at the year-end parties of Lebanese banks. What were once soaring profits have now taken a beating on a sluggish domestic economy, ongoing turmoil in neighboring Syria and increasing international scrutiny and regulations. Add to this the uncertainties of the global economy and the party planners might just opt for Almaza instead.
After reporting double-digit profit growth from 2005 to 2010, profits declined by three percent in 2011 to end the year at $1.6 billion. 2012 has not been any better: Bank profits were $356 million in the first quarter, a four percent drop relative to the first period last year. “The level of profitability has been adversely affected by the operating environment; net interest margins [the difference between interest gained and paid out] are under pressure” says Marwan Barakat, chief economist at Bank Audi.
It’s not all gloom though. Deposits stood at some $120 billion — roughly three times the size of Lebanon’s gross domestic product — as of the end of March this year. After growing by 8 percent in 2011, they added another $2.5 billion in the first three months of the year, equating to 2.2 percent year-on-year growth. While that is a drop from the double-digit growth enjoyed in previous years, given the domestic, regional and global uncertainties, many still consider it respectable. Assets held by the banks tell a similar story. As of the end of the first quarter they stood at $145 billion, after growing by nine percent in 2011 and three percent in the first three months of the year.
That Syrian feeling
Part of the reason for this fall in performance is the reduction in the balance sheets of subsidiaries of Lebanese banks in Syria. There are currently seven banks in Lebanon with affiliated branches in Syria and their total assets have shrunk by 17 percent in 2011 to end the year at $6 billion, though accounting for no more than 4 percent of the total assets of the Lebanese banking sector. The net income from their Syrian operations amounted to a meager $37 million in 2011, only 2 percent of the total net income of the sector. “The focus of Syrian affiliates now is on risk management. They are adopting a wait and see approach,” says Nassib Ghobril, chief economist at Byblos Bank. “All profits made in Syria are going towards provisions so that banks can be on the safe side.”
The impact from Syria on the banking sector is not limited to the affiliates of Lebanese banks. As Lebanon and Syria’s economies are strongly intertwined, the uprising in Syria has taken its toil on investment, tourism and the import and export industry in Lebanon, thus adding an indirect strain on the banks.
“The banking sector is the only one exposed to all sectors of the economy as the banks lend to all sectors of the economy,” adds Ghobril. “So if there is a slowdown or disruption in any of the sectors, let alone all them together, it will impact the banks.”
Lebanon’s economy, which the International Monetary Fund (IMF) pegged at $39 billion for 2011, grew by just 1.5 percent last year, and is forecasted to grow 3 percent this year, according to the IMF. The prediction for 2012 seems optimistic, however, given that it relies on “strong domestic policies and an improved regional environment.” The lack of government reforms, the ongoing Syrian trouble and the spillover into Lebanon, as well as the summer tourism season at risk due to Gulf Arab countries issuing warnings to avoid travel to the country, will do little to inspire confidence that the IMF’s assumption will become reality.
While the economy is still growing, the rate is anemic relative to the high single digit growth witnessed in previous years. Thus traditional banking is also being placed in a challenging position.
Loans to customers, while still at healthy levels — growing by 13 percent last year and another 4 percent in the first quarter of this year to hit just over $40 billion — have not been witnessing the same growth rate as in the boom years of 2009/2010, thus decreasing the net interest income of banks. Another source of banking income, the rates earned on their significant holding of treasury bills, are lower than in years past. However, they have seen their first rise in more than three years this year, moving up 50 basis points. The increase “has alleviated some pressure on operating conditions but not much,” says Barakat. The rates on Eurobonds increased slightly in 2011 — average yield increasing thirty basis points to 4.4 percent — but dropped again in the first quarter of the year to stand at 4.3 percent and remain at attractive levels for the government. International money markets are also extending record low rates, further constraining banks revenues. “We are highly liquid and our liquidity is primarily employed in OECD banks in advanced countries, which are offering record low rates putting pressure on spreads,” says Barakat.
To maintain their margins, banks have had to gradually drop interest rates on deposits in the past couple of years. The monthly average rate reached 5.6 percent in December 2011, down from 7.2 percent in December 2008 on new or renewable Lebanese lira deposits, and 2.8 percent down from 3.3 percent in 2008 on US dollar deposits.
One example of an additional cost burden imposed by international regulators would be the compliance with the United States’ upcoming Foreign Account Tax Compliance Act (FATCA), which requires all foreign banks to disclose the balances of their American account holders to the US’s Internal Revenue Services (IRS) to allow the latter to impose global income taxes. This move will be the first of its kind in a sector that allows a foreign government to effectively break Lebanon’s long-standing banking secrecy. That will add a significant operations cost to banks, not to mention a possible withdrawal of some tax-dodgers who hid their cash behind Lebanon’s soon to be penetrated wall of secrecy.
“In the last few years, we invested heavily in software, people and training as the requirements [from regulators] increased substantially and this cost the bank significantly,” says Walid Raphael, chairman of Banque Libano Française. These additional overheads have both increased the cost of doing business and stalled increase in income, thus bank profits are suffering.
“Lebanese banks are in a challenging environment because of the narrowing of margins and this will continue,” says Jean Riachi, chairman of FFA Private Bank. “It is the new normal and we need to get used to it. We can’t expect to have high returns on equity anymore.”
This article was published as a part of a special report in Executive’s June 2012 issue.