If there is one figure that summarizes the significance of the banking sector in Lebanon, it is that total assets stood at $148 billion as of the end of September 2012. That’s a 5 percent increase so far for the year, despite Lebanon’s dreary economy, and means that Lebanon’s 71 commercial banks control assets worth 3.5 times the country’s gross domestic product.
What is less cheerful for bankers this year is the declining growth rate in assets and deposits, with profitability also expected to be down by the end of the year. Scenarios range from Byblos Bank chairman François Bassil expecting profits to drop 25 percent, to Blom Bank chairman Saad Azhari’s more optimistic scenario for flat profits this year.
For the first nine months of the year, alpha banks — the 12 largest with deposits in excess of $2 billion — reported total net profits of $1.2 billion, a 5 percent increase on the same period last year, which was marked by a domestic political vacuum and the beginning of the Syrian uprising. This is in contrast to the years prior to 2011, when banking sector profits were growing at double-digit rates. This year’s drop in profitability comes alongside an increase in provisioning, as alpha banks set aside $293 million for bad loans in the first nine months of the year, 3.5 times the amount allotted over the same period last year, according to Bankdata financial services.
In a year stacked with challenges — from turmoil in neighboring Syria, to increased international scrutiny, among others — the 5 percent growth in commercial bank assets in the first nine months of 2012 is down only two percentage points from 7 percent growth in the same period of 2011. But the rate is less than half the 11 percent average growth for the past five years. Deposits, standing at $121 billion as of the end of September, also grew by just more than 5 percent, a slight decrease on 2011’s growth rate of 5.6 percent, but a more significant decrease when compared to the average 10 percent growth rate of the past five years.
“We are watching the trend. If it continues then it could be a concern” says Pik Yee Foong, chief executive of Standard Chartered Bank Lebanon.
Jean Riachi, chairman of FFA Private Bank, notes that, “The new normal is to have a growth rate in deposits in the single digits as remittances are not as strong as before, given the worldwide recession and the Arab turmoil hitting Gulf countries.”
Slower deposit growth is occurring in tandem with a slower local economic growth. The International Monetary Fund’s most recent estimate put Lebanon’s growth at 2 percent for 2012, in line with Egypt and Bahrain.
“If you want to be optimistic, you can say for sure deposit growth is at a much lower rate than before, but it is still much above the minimum needed to support a 4 to 5 to even 6 percent GDP growth in Lebanon, and finance the public and private sectors,” says Freddie Baz, chief financial officer of Bank Audi.
Both the public and private sector are highly dependent on the banks to meet their funding needs. At $42 billion, banks increased their lending to the private sector by 6 percent in the first eight months of the year, versus only 2 percent for the public sector, which reached $30 billion on commercial bank loan books.
“With lower growth in deposits, the government cannot expect to keep on relying on the banking sector to fuel expenditures and will need to cut the budget deficit,” warns Riachi.
With the economic pie no longer growing at the same rate as in previous years, competition is bound to get fiercer. “We witnessed more cutthroat pricing from the competition and banks fighting over clients that are not worth fighting over,” says Tarek Khalife, chairman of Credit Bank.
Back to the basics
Compounding this is the fact that Lebanon has the 13th highest bank penetration rate worldwide, with 97 branches per 1,000 square kilometers according to the International Monetary Fund.
With pressures on profitability this year, several banking leaders told Executive they have tried to focus more on improving services and reassessing their cost structure, with the sector’s overall cost-to-income ratio dropping 1.6 percent in the first six months of the year to stand at just under 47 percent. “Most banks are following austere operating expenses policies,” says Baz. Standard Chartered Lebanon’s Foong added, “We are using this time to reevaluate our competitiveness and at the same time we are investing in improving customer service, systems and processes, compliance, etcetera.”
All in all, however, Lebanese commercial banks continued to enjoy solid fundamentals throughout 2012, largely thanks to the usual suspects: a regulator that has remained staunchly conservative through the years, forbidding bankers from engaging in risky activities, as well as the banks’ assets being predominately owned by local players who remained disinclined to cash out and flee.