While some experts believe this year will not be different than the last for Lebanon’s banking sector, others are not so sure. Most agree, however, that conservative policies set by the Lebanese Central Bank allowed the banking sector to avoid any major effects from the global financial crisis. Prohibiting Lebanese banks from purchasing subprime products in the US, building up its foreign reserves to $13 billion (acting as a preventive measure to guarantee the Lebanese lira’s stability), ordering banks to have a minimum of 30 percent of their total assets in cash and setting rigid loan level ceilings for real estate projects, the central bank has played it cool by keeping assets safe and close to home. As of November 26, 2008 Central Bank Governor Riad Salameh announced that the combined assets of Lebanon’s banks totaled more than $100 billion — four times the country’s GDP. Bankers in Lebanon have agreed that the central bank takes pride in shying away from complex investments and structured products that it does not understand, and with the international circumstances that unfolded, it was definitely the right move to make for the Lebanese banking sector. Unfortunately, one thing the central bank cannot protect the sector from is political instability.
Well-known for its volatile social and political environment, Lebanon made a recent comeback after the Doha Accords were signed at the end of May 2008. Foreign remittances by expatriates were the best proof that Lebanese abroad viewed local banks as safe havens, totaling $5.5 billion by July 2008. Those remittances are expected to have surpassed the $6 billion mark by the end of the fourth quarter 2008. In just the first nine months of 2008, deposits into Lebanese banks reached an astounding $7.8 billion — up from the previous record high $6.6 billion for the entire year of 2007. The Economist Intelligence Unit (EIU) predicts that with the June parliamentary elections approaching, a rise in political uncertainty this year is expected to have a negative impact on the flow of foreign remittances into Lebanon. Nassib Ghobril, head of economic research and analysis at Byblos Bank, believes deposit inflow is “likely to slowdown this year, because a big part of the deposit inflow is from the Lebanese diaspora,” adding that, “the key question is, will these expatriates have the same purchasing power and liquidity as they did before the global financial crisis?” He concluded, “this year is definitely going to be different, economically, than last year.”
A rock, but not an island
While the Lebanese banking sector has so far been insulated from the global financial crisis, it is not isolated. Lebanese banks will begin to feel the inevitable decline in economic growth in the coming months. The EIU forecasts economic growth in Lebanon to slow to 2.7 percent in 2009 — down from its previous outlook of 3.1 percent — while finance minister Mohamad Chatah projects a three to 3.5 percent growth rate, down from a previous estimate made in 2008 of five percent. Factors affecting the country’s growth are mainly due to political uncertainty, economic contraction of Western markets and sluggish growth rates in the Gulf. These elements are likely to have an implicit impact on Lebanon’s tourism, real estate, construction and financial sectors, according to the EIU. Despite high levels of liquidity, meager exposure to real estate lending, robust deposit bases and strong support from the central bank, Lebanese banks could be adversely affected by the high political risk and sudden outbreak of conflict that has threatened the country in the past, most recently in 2005, 2006 and 2007.
Beginning the New Year on uncertain ground, banks in Lebanon are still waiting for fourth quarter results to be announced. Ghobril asserts, “It is clear from the third quarter 2008 results that [fourth quarter outcomes] won’t match past results. The fourth quarter was more challenging than the third quarter.”
This year, banks will be even more prudent than before, as the global financial crisis has taught every bank lessons that can only be learned in the crucible. Ghobril highlighted the increased competition amongst domestic banks, as lending opportunities “will be scarcer.” Moreover Ghobril says, “banks will be more careful in scrutinizing their lending opportunities,” especially since “lending opportunities abroad are likely to decline.”
More crucially, Lebanese banks will need to manage their liquidity. “Another concern is the excess liquidity in Lebanese pounds that accelerated in recent months, and where to place this liquidity,” he contends, although the top priority on banks agendas this year will definitely be about “maintain[ing] liquidity over profiting,” Ghobril adds.
Bank stocks
Like most stocks on the Beirut Stock Exchange (BSE), bank shares are vulnerable to Lebanon’s political environment. Thomas Schellen — publishing editor at Zawya Dow Jones — contends that, “Share prices of Lebanese banks have definitely been sensitive to the political risk and other developments.” This was most evident in May 2008; after the Doha Accords were signed, bank shares shot up but have since declined. Schellen notes that major banks such as BLOM, Audi, and Byblos “have been on a rather steep slide” since the middle of last year.
Yet Ghobril points out that “stock markets have not really reflected the performance of the listed banks,” and that “they are doing much better than their share prices in terms of performance.” Due to the lack of liquidity and small size of the BSE, bankers seem to turn a blind eye to share prices as the sector has been outperforming itself in the last few years.
Forecasts
Overall, 2009 will be a year of vigilance for the banking sector in Lebanon. Schellen said he would prefer to “use dice or Chinese oracles” to predict what will happen this year, “because in the current economic environment — on a global scale — it’s very unlikely that anyone’s predictions will be on target for 2009. There are so many challenges.” Without a doubt, the most difficult hurdle to prepare for in Lebanon is political uncertainty. Ghobril said he “cannot overemphasize the importance of maintaining political stability,” as it is “key to increasing confidence, which in turn encourages new projects, investments and businesses to expand and consumers to borrow.” But, with Lebanon’s political history, one can never know. “With the elections approaching,” says Ghobril, “it is likely that consumers will be apprehensive and investors will take a ‘wait and see’ approach.” Marwan Mikhael, head of research at BLOMINVEST Bank, expected that as long as the political situation is secure, “2009 will be a record year” for Lebanese banks. If the environment does worsen, on top of slower growth, Mikhael foresees “a slowdown in the capital inflows to Lebanon.”
All in all, Ghobril trusts that this “year will be conservative and cautious, [as we wait] for things to clarify domestically — regarding the political front with the elections — and regionally, economically and financially.” On the bright side, Lebanon’s resilience to political impermanence has enabled the banking sector “to adjust in an environment of political instability,” notes Ghobril. With the unpredictable global financial events and domestic uncertainties, pragmatic approaches throughout the banking sector are indispensable this year. Schellen has faith in the country’s banks and concludes that “confidence in the banking sector does not seem to have waned, as far as I hear, as compared to confidence in banking sectors elsewhere, I think the Lebanese [banks] still shine and look like gold right now.”
