Executive sat down for an exclusive interview with Charles P.S. Hall, CEO of HSBC Lebanon, to discuss the current prosperity of the Lebanese banking sector, the regional sector’s performance in 2008 and prospects for 2009.
E Looking back at 2008, how did the Lebanese banking sector perform?
The Lebanese banking sector has actually been very resilient. I think the central bank can take a huge amount of comfort from that.
The most drastic accounts are what has happened recently, with the global credit market drying up and the fact that Lebanese banks have been very prudent in managing to escape the worst of it. As you know, they benefit substantially from inflows of money. I think there is the perception that the Lebanese banking system has weathered the storm and is therefore continuing to attract deposits, which have been flowing in. I understand in many cases that some of the private bankers have switched into Lebanese pounds, which yield a much higher rate than US- dollars. So as long as that premium exists in terms of the Lebanese pound, you’re probably going to see continued inflows of money, which benefits the economy and that benefits the government when it comes to capital raising exercises such as issuing more Eurobonds that have financed the country’s economic side of things.
E Why do you think the Lebanese banking sector is doing so well even after the global financial crisis?
Well, in fact the Lebanese banking sector is doing nothing new. It’s just continuing the prudent approach it has taken in the past. It’s just that the model has worked and nothing has really changed. The Lebanese banks have not had the same problems that the foreign banks have had, the business models are very, very different. You look at some of the UK banks; for every $100 they were taking in, they were lending out $1,200 — something’s going to have to give. The Lebanese banks are very well capitalized and they don’t have that type of liquidity problem.
E Would you say that the Lebanese banks have benefited from the global financial crisis, or is to too early to tell?
Oh, they have clearly benefited, especially in terms of the inflow of funds.
E Do you think the Lebanese banking sector’s current prosperity will continue into 2009?
I see no indication why it shouldn’t. I suppose there are a couple of issues that might arise. If you look at a number of other countries that are in real difficulty, they’ve actually had to price their sovereign debt, their government debt, well above 9%. You look at somewhere like Iceland, they’ve had to actually price their debt at over 20% to attract inflows of funds. There is no indication at the moment that the government here is going to have to compete with those markets and they’ve got a large enough Lebanese diaspora that feels that Lebanon is very much a part of their own and will continue to support it. So, I don’t see any problems in the short-term. In the longer term, the government is going to have to address the debt level… but at the moment I don’t see any problems with that, as there are such large inflows of funds to support it. As long as the political stability remains here — or some sort of political status quo — then I think Lebanon is probably as well placed, or better placed, then many countries.
E Credit Suisse predicts Lebanon’s GDP to rise a mere 3% this year and 4% in 2009 – whereas the IMF forecasts a 6% GDP rise for 2009. Which forecast do you think is more accurate, and why?
Well, I think all bets are off at the moment, because we just don’t know what’s going to happen. Lebanon is part of the global economy anyway, whether we like it or not, and is not going to be immune from the flow of trade in either direction. Lebanese are descendants of the Phoenicians, the world’s greatest traders, so without actually knowing how the trade flows are going to evolve, we can get some sort of idea at the moment from our trade finance business… we’re finding, actually, still that the flows of trade are very healthy, but at some point it is bound to be affected. So I just don’t have a feel as to how the GDP will look, but I would err on probably the more conservative side now. When the Credit Suisse report was written, things were very different.
E Do you think Lebanese banks will continue expanding regionally to help them grow?
Audi, BLOM, all the major banks have. I think the [recently broken deal between EFG-Hermes and Bank Audi] was a sensible move, because they couldn’t agree on a price and in the current markets you just don’t know what’s happening. Audi is a very well run bank and I think it was very prudent, because you just don’t know what the exposure of the other bank was going to be. They’ve probably done their due diligence and I can’t really comment on that. But, I know the central bank has actively encouraged the major Lebanese banks to diversify outside Lebanon to make sure their eggs were not all in one basket. You’ve seen Audi expand dramatically into Egypt and into a number of other countries too. Syria has been a major one for them. I think it’s been very prudent for them to do that.
E What role would you say regulation plays in protecting banks? Do you think Lebanese banks are less affected by the current crisis than GCC banks due to tighter regulations set by the Lebanese central bank?
Yes, I think that is absolutely right. Lebanon has actually exported bankers for many, many years within the levels of HSBC — the person that runs HSBC in the Middle East is Lebanese, the head of global banking markets in the whole of HSBC Group, is Lebanese… So I think the Lebanese are probably some of the smartest people when it comes to running banks, and the central bank here, well, as you know Riad Salameh was voted Governor of the Year in 2006. Some people have said to me that some of the regulations have been draconian, but that has actually paid off. The exposure by banks to these credit default swaps is negligible. Now that’s not to say that these instruments are not useful, they have their use, but they’ve been abused. I was talking to one Lebanese banker and he said that the treasury department of this major bank didn’t understand these particular instruments… and because they didn’t understand it, they didn’t actually buy them. That says something of the management of those banks. So yes, the central bank has a very clear role with regard to regulation and has been central towards making sure that the economy has benefited because the government and the banks are essential and they need each other and they have been a success for Lebanon.
E How would you explain the $7.7 billion — up from $6.6 billion in 2007 — inflow of bank deposits into Lebanese banks in just the first nine months of 2008?
Well, a lot of it has to do with the booming property market as people are actually shifting money into Lebanon. We’ve seen it, we’ve had a 250% increase in our home lending. If you take that across the whole banking sector, and I know it wouldn’t have been as much in terms of percentage increase, but if you take that kind of thing into account then you can see fairly quickly that the lending side for property has attracted a lot of funds, mainly from the Gulf and the Lebanese diaspora. I’d say that is the main factor, certainly for the first nine months. But also, people are repatriating money. A lot of people have emigrated out of Lebanon into the Gulf and are bringing their money back.
E Was the Lebanese banking sector affected by the May events?
It was interesting actually, I was here at the time and I met a few customers. In fact, as the problems were happening I was down in our trade finance area and there was a customer bringing in a letter of credit. When I was talking to him about it he said, “These things happen, life goes on!” We detected, obviously, a slowing down for a couple of days, but then there was a pent-up demand and business was back to normal. In fact, actually, there was a sort of sense of euphoria after the events and people went into a sort of a holiday mode thinking all their troubles had been sorted out — it was really quite bizarre.