Lebanese banks had their fair share of challenges to deal with in 2012 : a stagnant economy; the ongoing turmoil in neighboring Syria; increased scrutiny from the United States; increased regulatory requirements; America’s upcoming Foreign Account Tax Compliance Act (FATCA); the anti-Iranian lobby urging foreign institutions to drop their holdings of Lebanese debt; cyber attacks on Lebanese bank accounts, and the list goes on.
These challenges have not left the sector unscathed. Deposits and assets of the sector, while still up in 2012, are growing nowhere near the rates enjoyed a few years ago. End-of-year profits are expected to drop in 2012 with several general managers expecting falls at double-digit rates.
The big nasty
First and foremost on bankers’ list of concerns is the ongoing unrest in Syria and its spillover into Lebanon and its economy. There are currently seven Lebanese banks present in Syria with total assets standing at $5.2 billion as of the end of June 2012, though this amounts to a meager 3 percent of Lebanese banks’ balance sheets. Profits generated from these Syrian affiliates stood at $30 million for the first six months of the year, just below 4 percent of the total sector profits. To stay on the safe side, banks allocated $293 million in collective provisions — held against unidentified losses on a portfolio of loans — in the first nine months of 2012, after allocating $232 million in 2011. “Our profits in Syria are allocated as provisions; there are no contributions from Syria to our earnings,” says Freddie Baz, chief financial officer of Bank Audi.
But the impact of Syria’s ongoing chaos on Lebanese banks goes beyond their presence inside Syria. With international sanctions placed on Syria, US regulators have kept a close eye on Lebanese banks to ensure they don’t become a funnel for Syrian cash. Officials from the US treasury have visited Lebanon on numerous occasions in 2012: US Deputy Secretary of the Treasury Neal Wolin met with Lebanese government officials in September and David Cohen, the Treasury’s under secretary for terrorism and financial intelligence, warned banks back in May to be extra cautious when dealing with Syrian transactions, saying, “We want to be as careful as possible that the regime, its cronies and its allies that may be trying to shield their assets might not be able to do so.”
Several experts Executive spoke to said they believe that the international scrutiny imposed on the banks is excessive. “I believe the business of banking is changing dramatically; we investigate deposits rigorously as if in a police state,” says Anwar Jammal, chairman of Jammal Trust Bank. “A lot of US and European banks have made far bigger mistakes and gotten away with a slap on the wrist, keeping in mind that to err is only human.”
He adds that his bank has just finished implementing a new anti-money-laundering software program that makes the 17 different ways of spelling the name ‘Mohammad’ into one word. “If you spell it in one way or one of the 17 different ways, it will tell you it is ‘Mohammad’,” explains Jammal.
“There was an accident or two in Lebanon but the scrutiny is exaggerated,” says Rami el-Nemr, chairman of First National Bank. “There were lots of rumors; it became the talk of the town. I think it was not fair for the banks.”
For a segment of the Lebanese population, this scrutiny is bound to get personal. The upcoming FATCA requires all foreign institutions to disclose the holdings of their clients with a US nationality, or face paying hefty penalties; this has already led several local banks to lose business. “We have already lost some clients but we have to deal with FATCA and Lebanese banks have to deal with it too,” says Jean Riachi, chairman of FFA Private Bank. The total number of Lebanese Americans with accounts in Lebanon is hard to come by, but several chairmen of Lebanese banks say it is a small percentage of total accounts — “definitely single digit,” according to Saad Azhari, chairman of Blom Bank.
A sigh of relief came in October when the implementation of FATCA was delayed by a year, until January 2014, giving foreign banks additional time to set up the software and teams necessary to comply. And comply they must. With two thirds of the sector’s balance sheet in dollar deposits, “the US rule is ‘my dollar, my rule’; you want to deal with the US dollar, you have to abide by my rule,” says Bank Audi’s Baz.
The compliance department is not the only one receiving more bank resources. The information technology (IT) department has seen its budget buffed up in order to deal with a different type of threat: a cyber one. In August, a cyber virus dubbed ‘Gauss’ attacked bank accounts in the Middle East. Kaspersky Lab, a Moscow-based IT security vendor, discovered the virus and claimed it began operating in September 2011, attacking some 2,500 machines in the Middle East, of which 1,600 were in Lebanon. “It is a lot more destructive than war,” says Jammal. “It has the ability to wreck havoc around the world. It mushrooms and it is something that is very serious and we take it very seriously.”
It’s been a rough ride for banks in 2012 with challenges continuing to pile up. The prospects for 2013 don’t look much rosier with the Syrian horizon still unclear, and with “a lot more open issues in the region; if I had to hierarchize what does not make me sleep at night, it’s the Israeli threats on Iran which can generate a hell of a lot of problems everywhere,” says Baz.
The banks, having survived Lebanon’s history marked with strife and unrest, are accustomed to dealing with challenges, and know how and when to reinforce the fortress.
“Given the resilience of the Lebanese people, the banking sector will come through ok, inshallah,” says Pik Yee Foong, chief executive of Standard Chartered Bank Lebanon.