With $42 billion tied up in loans to the private sector, accounting for 28 percent of commercial banks’ balance sheet, the dismal performance of the economy has banks reassessing their lending strategy.
“Banks are being flexible with some clients in terms of extending maturities,” says Ghassan Assaf, chairman of BBAC. Anwar Jammal, chairman of Jammal Trust Bank, notes that, given the dismal tourism season, “We scrutinized lending to projects involving hotels and restaurants as any feasibility or payback program they give you needs to be revisited.”
Loans in decline
For now, there has not been a significant rise in default rates, according to the chairmen of Lebanese banks that spoke with Executive, but if the deteriorating economic situation does not start improving soon, this scenario is bound to change. “Hopefully, we will have a smooth Christmas. It is important for tourism and for sectors linked to tourism,” says Saad Azhari, chairman of Blom Bank.
The fatigued economy has not prevented banks from continuing to extend their lending arm but the growth in lending has been declining in the past two years. “We are not lending to tourism and hospitality. We are lending to people who can export, unless it is something essential for the local market,” says Rami el-Nemr, chairman of First National Bank. For the first eight months of the year, banks lent an additional 6 percent to the private sector, down from an 11 percent increase in the same period last year and 17 percent in the same period in 2010. The private sector still swallows a larger share of banks’ lending capacity than the government — a strategy the banks have slowly been implementing in order to reduce their hefty exposure to the country’s sovereign.
While European banks knock on their governments’ doors for bailouts, in Lebanon the sovereign owes its local banks $30 billion as of August 2012, 20 percent of the banking sector’s balance sheet. But the growth in lending to the sovereign has been slowing — for the first eight months of the year it increased just 2 percent, following a 6 percent decrease in the same period of last year.
As Executive went to print, Lebanon was still in the process of raising $2 billion in Eurobonds to refinance $1.5 billion worth of debt maturing in 2013, while using the rest for treasury expenditures. In June, the country issued Eurobonds worth another $2 billion for the early redemption of Lebanese lira treasury bills and two months prior to that, in April, $950 million worth of Eurobonds were issued. So if the latest issue goes according to plan, Lebanon would have raised a total of $5 billion in 2012, as it had originally planned at the beginning of the year.
Balance the budget
Due to attractive interest rates, the government has been able to depend on the country’s banks to fund its expenses year after year — a situation that becomes less tenable as growth rates of deposits flowing into the banking sector drop (see overview page 88).
Lebanon’s debt-to-gross domestic product ratio has been consistently falling: from a jaw dropping 180 percent in 2006 to around 130 percent today. With GDP no longer growing at the high single digit rates that were enjoyed in the past — as the year ends the IMF expects a 2 percent growth for 2012 — the debt component needs to come down for the ratio to continue on falling.
“I believe banks will exert pressure on the government to balance the budget,” says Assaf. With deposits unlikely to start flowing back into the banks’ vaults at supersonic rates any time soon, the sector will likely continue conservatively allocating its resources favoring the fatigued, yet more lucrative, private sector over the heavily indebted public sector; unless the well overdue reforms are implemented.
“If reforms which should have started years ago are implemented, it will create opportunities; they have to happen one day,” says FNB’s Nemr.