Each year the observers and analysts of Lebanon’s banking performance eagerly await the publication of Bilanbanques, a wholly numbers-driven compendium of data and performance ratios on the banking sector produced by Bankdata Financial Services. Executive sat down for an interview with Dany Baz, Bankdata’s general manager, to enhance our understanding of the latest developments in the sector.
What is your most striking impression from recent data on banking in Lebanon?
What strikes me first is once again the resilience of the banking sector that was able to maintain a satisfactory performance despite the increasingly tough operating conditions. The banks that have chosen to expand regionally have handled the downturn in neighboring countries with minimal impact on their financial strength and performance, while banks that focused on the domestic market have had to face the slowdown of the Lebanese economy and the increasingly competitive operating conditions and have also managed to keep up.
Another striking fact is that there are pockets of opportunities for banks domestically, as some segments are under-borrowed; the SME [small and medium enterprise] sector for instance has also shown resilience versus the economic slowdown. Many of these enterprises have also decided to go cross border and have done so successfully.
How does the under-borrowing of SMEs affect us?
On a global level, the economy is running at a much slower pace than it should be. Companies in the category of small and medium enterprises, meaning SMEs with more than 5 and up to 150 employees, number approximately 20,000 companies that generate around $5 billion of annual turnover. If you take into consideration that there are something like 200,000 registered establishments, this shows that these 10 percent of enterprises generate around 10 percent of Lebanon’s GDP [of $43 billion]. Interestingly, only over a third of these SMEs are borrowers and their borrowings amount to around $2 billion of various loans and facilities. If this ratio is raised to 50 percent, it would represent about $600 million of untapped business for banks over the upcoming years.
[pullquote]There is quite a lot that the banks are doing for the economy and they should not be penalized because of the transparency they have adopted. [/pullquote]
Currently, with debates over profits and taxes of banks, it seems that the banker is everyone’s favorite villain. Do they deserve it?
Banks are traditionally the driving force behind economic growth and consequently contribute to the welfare of citizens. Obviously, banks are profit-oriented organizations and are definitely into improving their profitability and shareholder value. But I think you can say that of any venture and in some businesses, like the food industry where you can poison people, you have many more ethical concerns than in the money or service business.
Are banks paying enough taxes?
They are the biggest taxpayers in the country. They contribute more than one third of all taxes on profit and bank employees contribute nearly 30 percent of all payroll taxes in Lebanon. Banks settled about $400 million in taxes in 2012. Tell me one sector that is doing the same. I think banks are the number one employer, the number one taxpayer, and they don’t even recoup VAT [value added tax]. There is quite a lot that the banks are doing for the economy and they should not be penalized because of the transparency they have adopted. Tax evasion is estimated at $3 billion yearly, i.e. 7 percent of GDP — this is where the real change should take place.
In your opinion, would a permanent increase in the taxation rate of banks impact the economy?
I honestly don’t think that raising [VAT] by 2 percentage points is going to rock the boat. The problem is that the economy is in a slowdown and there is very little leeway for the government today. In a different context, I don’t think 2 percent would make a difference. But today nothing [in terms of tax increase] is acceptable.
That is on VAT in general. But how about the specific taxes on banks that have been proposed?
When you have a sector that is vital for the economy, you don’t want to burden it in times such as these. In my view, everything that was discussed is acceptable and I am sure even the banks will say that — but is it acceptable today? No.
What would you consider as a minimum healthy growth rate and prudent performance indicator for the banking sector?
The IMF estimates a 5 percent growth in customer deposits is the minimum required to finance public and private borrowing needs. I wouldn’t take the growth of assets as a measure for the health of banks. I would take the return on equity. Today we are at just over 12 percent in return on equity and this is low if we take a look at other financial sectors in MENA countries. Everybody will expect the ratio to be closer to 20 percent.
[pullquote]Tax evasion is estimated at $3 billion yearly, i.e. 7 percent of GDP — this is where the real change should take place[/pullquote]
Bankdata is the organization that initiated categorization of banks according to deposits. What is the rationale for making the distinction between alpha, beta, gamma and delta group banks?
Segmentation helps external people and the bankers themselves to benchmark against banks of the same size with comparable operating conditions in terms of network and staff, for instance. You have to compare apples to apples: the purpose was to facilitate comparisons.
You raised the threshold of financial size for the alpha banks to $2 billion in deposits quite a while back. When was that and why is it prudent to keep it at that level still today?
We raised it in 2004 so it will be ten years this year. We review it every year to see if a change in the definition of categories is warranted but if the difference [between the old and new deposit size benchmark] is around 10 percent, it is not worth [changing] it. The issue is to have a look at the even distribution of the four categories and not just the top banks.
Your company is regarded as the authority on measuring the performance of Lebanese banks. Should that be done by a private sector company, or rather by a government agency?
I don’t think it is the purpose of the regulator to publish market shares and ranks but rather to monitor compliance and follow up on performance. We are much more flexible in our approach and have two-way communication with the banks, which is not something that you would have if you were addressing this from the public sector.
How confident are you that the information you publish is accurate, especially on some highly watched ratios where people might want to look better than they are?
They cannot because we have our own controls, both specific and general. Of course there are human errors and if we see a growth rate by a bank that is incoherent on any criteria, even if it is a small item on the balance sheet, we immediately call the bank. And if there is a correction in one bank, we call 70 banks to align. This is our added value.
How many items do you check each time when you review the banking performance?
That is an interesting question and I have never looked at it this way. (Consults briefly with staff.) We review 410 items times 70 banks times two because we control two years in every edition [of the Bilanbanques yearbook]. That means we cover 57,000 pieces of data for every edition.
Do you do that for the love of numbers?
No, for the love of credibility.
How did the concept occur to you?
This is a company that was founded by my husband, Freddie [Baz]. He started it 32 years ago because this is his forte and I learned the job. The methodology and the continuous enhancement and update of the methodology rely a lot on him but I have been running the show.
[pullquote]Some banks provide unpublished figures and if they request for them not to be published, they will never be published or made available to anybody[/pullquote]
Are there any conflicts of interest for Bankdata because of the fact that your husband is a senior executive at the top bank in Lebanon?
When he first started with [Bank] Audi, he was merely an adviser and there was no particular drawback. At some point, perhaps other banks might have felt a conflict of interest but they have realized that this is not the case. We cannot twist figures in any way. In addition, the fact that he combines macro and micro views and experience are a plus to continuously update and enhance our methodology.
So you would not provide information exclusively or faster to one bank than any other?
I would be shooting myself in the foot, honestly. The open climate that we have with the banks is based on them knowing that we are very keen on preserving [confidentiality]. They trust us with their figures. Some banks provide unpublished figures and if they request for them not to be published, they will never be published or made available to anybody.
What valuation do you attribute to the company that you manage?
Bankdata is a profitable company, but it is not a company that will crush records of profitability. We are a service company and also do consulting and have very decent revenue. We have invested into our platform but if I were to value the qualitative part of it and not the multiples, the benefit to the sector is really priceless.
Are you a family business?
Yes, we are.
Do you have succession planning?
We should (laughs). Probably [the succession] will not be in the family, so we would have to transform.
