Several Lebanese banks, from Bank Audi to Bank of Beirut to Fransabank, raised capital last year through the issuance of preferred shares — stocks with dividends but without voting rights — and beefed up their total capital ratios. Last month, Société Générale de Banque au Liban (SGBL) became the latest Lebanese bank to issue $125 million of non-convertible preferred shares — an increase from the initial plan to issue $100 million, following oversubscription to the shares — at a 7 percent yield, redeemable after five years.
SGBL went a step further in strengthening its equity as it also raised its common equity capital by $200 million, bringing the total capital increase to $325 million. Of this $200 million common equity increase, half came from the issuance of common shares to the bank’s existing shareholders and the other half came from retained earnings, which totaled $115 million in 2012, meaning that the bulk of the profits were recapitalized. SGBL’s equity now stands at $810 million, a significant 40 percent increase from its equity prior to the capital increase.
Why now?
SGBL’s deputy general manager Georges Saghbini says the decision to raise capital was an internal one. “The motive is to consolidate the balance sheet of the bank, to contribute further in financing the Lebanese economy and to abide by [the upcoming] Basel III rules,” he says. The third Basel accord is a global regulatory framework imposing strict rules on capital adequacy for banks worldwide, to be implemented gradually starting in January 2013 and ending 2018. The Basel accords were developed in response to the financial crisis, which brought several international banks to their knees begging for government bailouts.
Higher standards
Saghbini expects that by the end of 2012, the total capital ratio of SGBL will have exceeded 10 percent, as per Banque du Liban (BDL), Lebanon’s central bank, Governor Riad Salameh’s expectations for the sector. Basel III requires banks to hold, by the end of 2018, a 7 percent common equity ratio, 8.5 percent tier 1 ratio and 10.5 percent total capital ratio. Salameh has implemented stricter rules on Lebanese banks than their international peers, demanding 8 percent common equity, 10 percent core tier 1 ratio and 12 percent total capital ratio by the end of 2015, three years ahead of international banks’ deadline. “Given our projected results and the capitalization of the results, [the ratios] should be easily reached without having to raise [additional] capital,” adds Saghbini.
While Nadim Kabbara, head of research at FFA Private Bank, is comfortable with the current equity levels of the Lebanese banking sector, he warns that “[the Lebanese banks] say they don’t have to raise additional capital to meet the requirements by 2015, but 2015 is a while from now so who knows what will happen by then.”
The stricter timeline for the implementation of Basel III accords by Lebanese banks puts pressure on the sector’s margins while the country’s internal economic situation is under stress. “Because of Lebanon’s large public debt and lots of political and security issues, [meeting the requirements ahead of schedule] will send a signal [to the international community] that we are taking additional risks into consideration and we are adopting higher standards,” says Marwan Mikhael, head of research at Blom Bank. Kabbara agrees, as he believes that “ultimately all of them (the Lebanese banks, BDL and the ministry of finance) realize that it’s in their best interest that confidence in the Lebanese banking sector remains high despite everything else that is happening in the region.”
