Gray, when not taken as the zone between black and white but as the color of unobtrusiveness and understatement — as well as secretive sway — has long been employed to characterize issues and people related to management in general and finance in particular. This type of gray is the color of power, and it suits Lebanese banking in 2014, just as it has done historically. But the gray of 2014 has been infused again, and even more so than in 2013, with an enormous caveat of politically induced paralysis.
The results of Lebanese banks in 2014 were not terribly surprising at all. Growth in total assets came in at 6.5 percent between December 2013 and September 2014, as per the performance review of the top 14 banks by deposits (the ‘Alpha Group’) which dominate the sector. Alpha banks, currently numbering 14, are defined by Bankdata as banks which hold deposits of over $2 billion.
Interaction with customers has generated growth in terms of deposits and lending. According to Bankdata Financial Services, growth in deposits at Alpha Group banks for the first three quarters of 2014 reached 6.2 percent. However, growth rates were skewed in favor of deposits in foreign units of Lebanese banks, which increased 12.3 percent versus the 5.0 percent growth in deposits in the domestic market. The latter number comprised faster growth in foreign currency deposits than in lira denominated deposits, which translated into a slight downshift of 0.4 percentage points in the dollarization rate of domestic deposits, to 63.8 percent.
[pullquote]Growth in domestic lending was moderate at 5.5 percent, compared to 15.1 percent growth in lending at units abroad[/pullquote]
The same skew in favor of overseas activities, applied to the lending side. Here, the overall nine months growth of Alpha Group portfolios was 8.3 percent. This corresponded to an increase in value to $58.5 billion by September 30, 2014, from $54 billion at the end of December 2013. According to Bankdata, growth in domestic lending was moderate at 5.5 percent, compared to 15.1 percent growth in lending at units abroad. Domestically, foreign currency loans constituted 52 percent of the Alpha Group’s combined portfolio at the end of September.
The profitability picture was less friendly and decidedly grayish in its domestic coloration. In consolidated terms, Alpha Group banks achieved 4.4 percent growth in net profits relative to the first nine months of 2013, Bankdata said. The Lebanese arena awarded 2.7 percent growth in domestic net profits.
As profit growth lagged behind increases in overall activities, the 14 banks experienced further net contraction in return ratios. The return on average assets fell slightly from 1.06 percent in the first nine months of 2013 to 1.0 percent in the first nine months of 2014, and the return on average equity declined from 11.89 percent to 11.35 percent, according to Bankdata’s analysts, who concluded that “return ratios of Lebanese banks remain weak when compared to their average weighted cost of capital, although justified by the persistent tough operating conditions in their main markets of presence.”
Verbal highlights in Bankdata’s descriptions of the Alpha Group’s outcomes of the first nine months were terms such as “fair growth in major banking aggregates” and a performance “persistently characterized by high liquidity and financial flexibility.” Other analysts and the decisionmakers at leading banks employed similar euphemisms to describe a gray year in the best possible terms.
[pullquote]Lebanese banks are looking increasingly prolific in their self evaluations[/pullquote]
Evaluation selfies
At a time when the selfie is perceived as the present and future habit of social communication, Lebanese banks are looking increasingly prolific in their self evaluations. No bank contacted by Executive expressed concern in their ability to meet their own targets in 2014. Banks confirmed, however, that they had aligned domestic targets with the subdued expectations at which they had arrived one year earlier after being exposed to a low growth environment in 2013.
BLOM Bank pointed to outperformance against the banking sector, comparing its 9.8 percent increase in claims on the private sector in the first three quarters against a 6.6 percent increase for the whole banking sector. The bank achieved 5.17 percent year to date growth in total assets to $27.5 billion at the end of September 2014, and net profits increased by 2.5 percent year on year by the end of September, said BLOM Chairman Saad Azhari.
“Our return on equity was at 15.3 percent, one of the highest in the sector, and compares well with the 11 percent of the banking sector. This was mainly due to the vision the bank has of its own operations focused on a balanced growth in net profit and all balance sheet items, with priority to control banking risks,” Azhari told Executive.
He clarified that foreign subsidiaries were the star performers in 2014. “In particular, the Egyptian market seems to be recovering well as our profits in our entity there jumped by 60 percent year on year at the end of September 2014. Our other foreign subsidiaries’ performances exceeded expectations too. So the increase in our net profit for the first nine months of 2014 came mainly from the increase in activity of our entities abroad, mainly Egypt, Jordan and the Gulf countries, as our domestic profits stagnated.”
Bank Audi focused with Argus eyes on the group’s expansionary markets in Turkey and Egypt, and cast a third eye on its private banking development. Defending their position as domestic market dominator was the fourth goal, one which the bank claims it has met. However, Audi Group chief financial officer Freddie Baz conceded that domestic performance was “in line with what banks have been publishing in terms of domestic assets and earnings growth at about 6 percent nominal growth. We have probably 2 percent real growth in context with a deflator of 3 to 4 percent.”
Bank Audi continues to expand into Turkey under the Odeabank brand
The group outperformed its budgets in Egypt and Turkey, he said. “We achieved targeted growth in Egypt and also additional efficiency gains, which translated into bottom line improvements beyond what was expected for the full year of 2014. In Turkey we had another interesting development whereby the outperformance is far more material because we had budgeted another year of negative bottom line as is normal for any greenfield operation.” While the 2014 negative bottom line assumption for the 2012 established subsidiary Odeabank was much lower than the 2013 assumption, the startup turned out to be a welcome surprise reporting a positive bottom line after provisions and taxes as of May 2014, far ahead of expected timeframes. Another growth highlight at Audi Group was the performance of the private banking activity which covers three European and three Gulf countries as well as Lebanon.
Read “The success of Odeabank” on how Bank Audi’s Turkish venture is performing beyond expectations
For Byblos Bank, the main highlights were its healthy ratios despite local and regional political uncertainties and the persistent domestic economic stagnation. The bank’s “conservative approach has been validated once again in 2014,” said Byblos Bank Chairman Dr. François Bassil. He added, “The bank’s results reaffirmed the confidence of our depositors, borrowers and shareholders, with customer deposits rising by 5.7 percent to reach $15.6 billion, and total assets growing by 2.6 percent to reach $19 billion at the end of September 2014. The results also reflected the bank’s firm support for the private sector, with net customer loans increasing by 5 percent to $4.73 billion at the end of the same period.”
While conceding that net income did contract in the first nine months when compared to the same period in 2013, Bassil qualified the drop as “small”, at 0.7 percent for a net $112.8 million in the first three quarters. “The results of the first 9 months of 2014 show that Byblos Bank has continued to maintain a high level of financial cushions in order to mitigate unexpected risks and to counter economic volatility.” He also pointed out that Byblos Bank’s capital adequacy ratio reached 16.5 percent, one of the highest in Lebanon’s banking sector and that primary liquidity placed with banks and central banks totaled $9.2 billion at the end of the third quarter, representing 48.7 percent of total assets.
In terms of assets at the end of Q3, BLOM Bank, Bank Audi and Byblos Bank were placed first, second and third respectively in the list of Alpha Banks prepared by Bankdata.
Banque Libano-Française, positioned in the mid tier of the Alpha Group, “expects to finish 2014 with a profitability level that is close to last year’s, noting that 2013 was a record year for our bank, with net profits of $101 million, 15 percent higher than 2012,” said chairman Walid Raphael. “Our loan portfolio has so far grown by more than 9 percent, while our customer deposits have increased by 5 percent,” he added.
[pullquote]With $11 billion in assets at the end of September 2014, Bankdata ranked BLF in eighth position in the Alpha Group[/pullquote]
Raphael, who was elected as BLF’s chairman of the board in September 2014 after the passing of his father Farid, who was the bank’s founder, told Executive that the bank’s leadership team remained “effectively the same team that has been managing the bank alongside our founding chairman for the past 10 years” and added that the bank “will continue pursuing its conservative and prudent growth strategy and to maintain high levels of liquidity and equity, while providing an excellent service to its clients.”
With $11 billion in assets at the end of September 2014, Bankdata ranked BLF in eighth position in the Alpha Group.
Representing a growing institution outside the Alpha Group, BML (rebranded from Bank Misr Liban) confirmed that performance at the bank was in line with targets set for the past year. “BML has performed well in 2014 compared to 2013, and this is noted in our dramatic increase in interest income as a result of our efforts to double our corporate portfolio which we were able to achieve,” said Executive General Manager Hadi Naffi.
According to Naffi, BML accomplished all its objectives for 2014 by implementing a consistent strategy. He expressed caution regarding Lebanon’s retail banking environment due to a combination of shrinking purchasing power and increasing costs of living for private households. Under these conditions “it’s very risky if we reach a level where retail lending is financing the consumer’s basic lifestyle or other consumer loans. Banks need to make sure that the consumers have the ability to repay their loans and are requiring loans for the right purpose.”
Attributing the difficult situation of private householders to “the current economic and political situation,” Naffi said the absence of economic growth is hindering the capabilities of the private sector. When asked if the main concerns of the banking sector over the national situation had been in any way solved in 2014, Naffi responded with an emphatic “no”.
“As for 2015, our main objective is to keep our corporate portfolio growing at the same pace, and to benefit from cross selling opportunities between the corporate and retail portfolio,” he said, adding that BML is working on upgrading its core banking system and will launch several new deposit and loan products during the year.
Pointing to two BLF achievements in 2014: receiving several awards for its card programs and recording a 100 percent expansion in assets under management, and five percent return in the year’s first 10 months at the LF Total Return Bond Fund, Raphael said of the bank’s plans for 2015, “we will continue to pursue our policy of managed growth in an environment that we expect to continue to be challenging.” This will include further diversification of product offerings and expansion of the domestic branch and ATM networks, but also entail an endeavor to continue to expand internationally in countries where BLF’s Lebanese clients have a presence.
[pullquote]New impulses for activity are thus concentrated outside of the domestic market, at least for the two largest banking groups[/pullquote]
Hunger for opportunities amid waiting games
Generally, banks’ plans for domestic activity in 2015 appear to be subdued under a prevailing view in the sector that the Lebanese economic slowdown “continues to be broad based, with consumption, trade, tourism, capital flows and investment indicators all pointing to continuing anemic economic activity”, in the words of Byblos Bank’s Bassil. Without a “comprehensive political agreement on all sides” this anemia is not likely to change in the near future, he cautioned.
New impulses for activity are thus concentrated outside of the domestic market, at least for the two largest banking groups. Given that the group’s positive results development in 2014 was driven by its overseas units, and that these units’ contribution to group profits increased year on year by three percentage points to about 24 percent in the first nine months of 2014, BLOM Bank’s Azhari said he expected the same trend for 2015, “meaning that our growth will be brought by our subsidiaries abroad, especially in Egypt, Jordan, and the Gulf.”
Likewise, Bank Audi is not betting on local horses to pull its profits wagon. According to the bank’s Dr. Baz, the group is confident that it will retain its leadership in the domestic market. In line with its strategic concept of four pillars, Audi will keep an eye on maintaining the advantages it has established over its immediate peers in terms of assets and other metrics, Baz said, “but we don’t have a very big [domestic] appetite under the current circumstances.”
When compared with his views on the Lebanese market, Baz was tangibly more enthusiastic about private banking activity, where the group aims to double the size of its franchise over the next three years, and the commercial banking units in Turkey and Egypt. These three business segments, together with preservation of the home advantage, constitute the group’s four strategic pillars.
In other foreign markets, Audi’s chief strategist expects that expansion in Iraq will remain on course as the group is seeking conversion of the seven branch licenses it obtained in the country, before the licenses lose validity in early 2016. Farther away, “we will probably start looking closer at sub-Saharan Africa ahead of preset timing as one single addition to the four pillars,” Baz told Executive.
Audi had already made known its intent to enter sub-Saharan Africa on the strength of having booked $2 billion on the group’s balance sheets from deposits, assets under management, corporate loans and trade finance facilities via its banking units in Beirut, France and Switzerland. But due to the recent strength of its growth in Turkey and Egypt, Baz said that the board decided to start exploring options for setting up in sub-Saharan Africa in 2015 instead of, as previously intended, after completely fulfilling key growth targets in Turkey and Egypt.
Meanwhile at home, all Lebanese banks are like every economic stakeholder in the position of waiting for that comprehensive political agreement, and a clear economic vision that would provide investors with incentives to take risks in the economy. That wait can’t be called a game anymore.
