Lebanese banks had to prove their resilience once again in 2011, though instead of dodging a global financial crisis, this time around they had to navigate a five-month government stalemate, the undoing of Lebanese Canadian Bank (LCB) and the continuing Arab revolutions.
For the first nine months of 2011, assets, deposits and profits all grew, albeit at much lower rates than those enjoyed in previous years. The total assets of the Lebanese alpha banks — the 12 banks with deposits in excess of $2 billion — stood at $143 billion, a 6 percent year-to-date growth, but a slowdown on the 11 percent growth in 2010 and 22 percent growth in 2009.
In February, the United States Department of the Treasury designated LCB as a “financial institution of prime money laundering concern,” accusing the bank of laundering hundreds of millions of dollars for a Lebanese-Colombian drug baron with links to Hezbollah, which Washington has designated as a terrorist group.
LCB was eventually bought out by Société Générale de Banque au Liban (SGBL) for an undisclosed amount, although banking sources in Lebanon put the figure at around $500 million.
The ordeal shook Lebanon’s banking sector, but several leading industry officials with whom Executive spoke said they were optimistic that there would be no recurrence of incidents of this sort.
“Definitely LCB was a big event, which was a concern for the market, but it was handled and now hopefully it is behind us,” says Walid Raphael, general manager of Banque Libano-Française (BLF).
Indeed, the general consensus is that the LCB debacle has nurtured, by necessity, a new culture of accountability on the road to transparency. “I think it was an individual case, and I think most banks have learnt a lesson,” says Jean Riachi, chairman of FFA Private Bank. According to Freddie Baz, chief financial officer at Bank Audi, “Important banks in Lebanon know their responsibilities and duties in terms of compliance.”
“LCB is an event that triggered some kind of extra focus,” he adds. “These crises can happen and they can quickly be resolved without collateral damage.”
But the Lebanese banking sector remains on the fence with regards to Syria, where the outcome of the uprising is still far from certain. While most in the industry say the impact on Lebanese banks has been contained thus far, they remain concerned going into 2012.
The US is also monitoring the Lebanese banking sector’s cooperation with Syria, and its official warning came during the visit in November of Daniel Glaser, the treasury department’s assistant secretary focused on illicit financing. He cautioned the Lebanese monetary authorities that banks in Lebanon were at risk of being blacklisted if they helped Syria dodge international sanctions.
“I think in 2012 the predominant local theme will be the Syrian situation. The impact has been contained so far,” says Khaled Zeidan, general manager at MedSecurities.
“The issue is you never know what might happen tomorrow in terms of sanctions,” BLF’s Raphael says with regards to Syria.
According to Baz, Bank Audi’s assets in Syria shrunk by one third due to withdrawals of deposits but he casts doubt on an assertion made in a November Financial Times article stating that a continuous flow of Syrian money is being smuggled into Lebanon. “Audi is the largest bank in Lebanon, with the largest deposit base, and we have not seen any material deposit from Syria over the last nine months,” he explains.
But aware of the potential for further sanctions, banks claim they are taking measures to protect themselves. Francois Pascal de Maricourt, chief executive officer of HSBC Lebanon, said: “When we can not have a proper assessment of the origin of the funds and when [they] could put the bank at risk, we have to turn down some business and I believe most of the banks in Lebanon are very careful and are doing the same.”
In fact, deposits, which stood at $118 billion at the end of September 2011, only grew by 5 percent year-to-date, compared to the 2010 rate of 12 percent and the 2009 rate of 24 percent. Profits grew by a marginal 1 percent to reach $1.2 billion, which fades in comparison to the staggering 25 percent increase in profits in 2010 and 18 percent in 2009.
The three largest Lebanese banks with branches in Syria — Banque BEMO Saudi Fransi, Bank of Syria and Overseas (member of BLOM Bank) and Bank Audi Syria — saw their assets fall by an average of 24 percent and deposits drop an average of 29 percent through the first three quarters of 2011.
Beyond the region
Looking beyond Syria and other regional turmoil, the European sovereign debt crisis has dominated headlines throughout the second half of the year and severely shaken the global markets. However, its impact on the Lebanese banking sector has been minimal. Banque du Liban (BDL), Lebanon’s central bank, has strict regulations on local banks which, “In normal times restrict our capacity to originate profitability but in difficult times act as important buffers,” says Bank Audi’s Baz. For example, banks are forbidden from investing more than 50 percent of their equity abroad and require that only investment grade fixed income be held in banks’ portfolios.
“Banks are very conservative when it comes to investing customer deposits. We do not speculate… so we didn’t see a major impact from the European debt crisis,” said Alain Wanna, deputy general manager and head of Group Financial Markets at Byblos Bank. In addition to imposing stringent restrictions to minimize volatility, BDL maintains stability through its stash of foreign currency reserves, $31.3 billion as of the end of July 2011, and its gold reserves, which reached $17 billion as of mid September, the second largest in the Middle East and North Africa region after Saudi Arabia. BDL governor Riad Salameh, whose term was renewed for a fourth time in July, has said he intends to keep the gold reserves to protect the economy from regional unrest.
“Lebanon is immune to what is happening in Syria and worldwide because of the model we have, which is a highly liquid, prudent approach to credit and low leverage,” said Salameh at a September meeting of Arab central bank governors in Doha, Qatar. Loans provided by banks in Lebanon still increased despite the challenges faced in 2011. In fact, lending at alpha banks increased by 13 percent year to date, a slowdown relative to the 25 percent increase in 2010 and 16 percent in 2009, but still a strong rate given the obstacles encountered this year. In spite of the continuous increase in lending, a survey completed in July by The Banker magazine revealed that Lebanese banks had the lowest loan to deposit ratio among the 1,000 commercial banks analyzed globally. “Who would you lend [to] in the absence of growth in the economy and a real government program to promote entrepreneurship?” asks Zeidan.
According to Saad Azhari, chairman of BLOM Bank, the figure that should be looked at is loans to gross domestic product: “Usually in underdeveloped countries, the ratio of loans to gross domestic product varies from 40 to 60 percent. In developed countries, it is between 80 and 90 percent.” Lebanon’s loan-to-GDP ratio is just over 90 percent. Furthermore, Byblos’ Wanna argues, loans to the public sector should be factored in to the loans-to-deposit ratio, noting that, “all banks have large portfolios on the government, whether in local or foreign currency.” According to the most recent report by the Association of Banks in Lebanon, claims by commercial banks on the public sector as of the end of August stood at $28 billion and claims to the private sector at $39 billion.
Of potential consequence to deposit flows is a measure within the pending draft budget proposed by Finance Minister Mohamad Safadi in October, which calls for a raise in the tax rate from 5 percent to 8 percent on the interest of deposits. The probable impact is not clear but it has sparked heated debate within the banking sector.
FFA’s Riachi is not concerned about the proposal. “I don't think it will affect flows, and I think people will think in terms of net interest and see where their advantage is relative to other banks.”
But some are worried about the measure’s timing. “We are [already] witnessing lower growth of deposits and lower capital inflows. It is not a disaster but it is not the right time,” says Azhari.
“I think fresh capital will remain hesitant for some time. You don't introduce something like this during difficult times, particularly when there appears to be many challenges ahead, and when investor and consumer confidence are in a period of retracement globally,” says Zeidan.
The road ahead in 2012
The International Monetary fund has projected 2011 growth in Lebanon to be 1.5 percent. The prospects for limited growth can be further reflected through low consumer confidence. Household spending accounts for 79 percent of Lebanon’s GDP, according to Byblos Bank, and a recent consumer confidence survey undertaken by Byblos and Olayan School of Business reveals that consumer confidence has been consistently falling since 2007 and reached a low in August 2011.
Looking towards 2012, and with excess liquidity sitting idle on banks’ balance sheets, the banking sector is hungry for growth opportunities. The prospects of deploying further capital in Lebanon seem poor, as expectations for 2012’s GDP are dim. The IMF is forecasting a pick-up to 3.5 percent but banking experts are concerned as many obstacles still lay ahead, namely political uncertainties such as disputes over STL funding, approving the draft budget and unresolved turmoil in Syria.
“The real issue for the banks will be how to continue on growing after the exceptional period they have been enjoying for the past years. Further expansion in other markets may be one of the solutions to be explored,” said Zeidan. Case in point: Bank Audi’s new license to operate in Turkey. According to Baz, it is the first bank in 14 years to acquire a banking license in Turkey.
Despite riding the challenges of 2011 relatively unscathed, it is critical for the banking sector in Lebanon, which still sits on big piles of cash, to hunt for future growth opportunities — a precarious task in an environment of political instability both locally and regionally.