The Lebanese banking sector has always had an exceptionaldegree of resilience given Lebanon’s checkered politicalhistory. The current political crisis and economic malaiseis no exception, with Lebanese banks reporting stronggrowth, launching new products, and diversifying throughexpanding into new markets.
But challenges do lie ahead for the sector. The situation isaffecting banks’ overall strategies – driving externalgrowth in particular – and with the implementation of theBasel II Framework only six months off, the requirements arelikely to act as a catalyst for further consolidation of thecountry’s heavily banked sector.
“The major problem we banks face stems from the differencebetween risk and uncertainty. Risk is something measurable –there are tons of models to manage risk – but uncertainty issomething not measurable. By its very nature, its parametersare flimsy,” said Shadi Karam, Chairman of BLC.
“The situation is creating a huge question mark onfunctional decision making in institutions. If you havequestions about tactical moves, it affects strategicalmoves,” he added.
And as Walid Raphael, deputy general manager of BanqueLibano-Francaise pointed out, “most players are onwait-and-see mode. We still see new projects, but the paceof investments are lower than early last year.”
Nonetheless, due to the unique role of Lebanon’s bankingsector in the economy, the real economy might be in thedoldrums, but the monetary sector is not. The reasons forthis are manifold: the huge remittances from Lebaneseabroad, which brings in an estimated 25% of the country’sGDP; banks’ high capital ratios; interest on lending to thegovernment; and a buoyant real estate sector.
“The major driver is GDP not foreign investment,” saidFreddie Baz, advisor to the chairman at Bank Audi. “TheLebanese are still the most important trigger for aggregateddemand, so is therefore GDP growth. We are not borrowingfrom domestic income but national income, from inflows fromexpats. As long as this exists, inflows are unrelated to thesituation in Lebanon and the monetary sector is immune,” headded.
This was evidenced last year when the war dampened growth onthe real sector and monetary sector deposits increased in2006 by $6.5 billion.
The cumulative assets of Lebanese banks also reflect thesector’s strong position. At $78 billion, or 375% ofLebanon’s GDP, the sector is far and above the regionalaverage of 90% of GDP, 107% in emerging markets, and 132% indeveloped economies.
This is in large part due to profitability of financingLebanon’s public debt, which is currently at $41 billion.
“Most profit comes form the government and will take time todiversify away from that,” said Semaan Bassil, Byblos Bankvice-chairman general manager. “So as long as the governmentborrows and pays, and keeps costs under control, banks willmake money but can’t rely on that forever.”
After all, returns on investments have slid from highs of40% in the 1990s to less than 10% after the Paris II donorconference. BLOM Bank’s TBs and Eurobonds, for instance, nowaccount for 17% of its balance sheet versus 24% to 25% in2003.
Nonetheless, BLOM is managing a new Eurobond issue withCitibank to raise $400 million for the government.
Products and more products
With so many factors at play, banks are adopting twofoldstrategies – consolidate market share and expand regionally(see page 40). With one eye on the region and the other onthe domestic market, banks have spent millions in the lastfew years on infrastructure and upgrading services.
In such a highly competitive market where the top threebanks – Audi, Byblos and BLOM – have over 50% of the marketand the other 61 banks vie for the rest, banks are coming upwith innovative ways to sell products.
“Lebanese banks are making big efforts in advertising andmarketing to attract new segments of the population,” saidElie Azar, marketing manager at the Lebanese-Canadian Bank.“It’s harder to attract new customers than keep customers,”he added.
As a result, banks have repackaged personal loans with newnames to entice customers, from solar panels and dental careto computers and plastic surgery. First National Bank (FNB)has been at the forefront of such campaigns, offering thehighly publicized plastic surgery loan.
“We are number 14 in size, but in relation to our peergroup, we spend a lot more on publicity than ourcompetitors,” said Yasser Mortada, deputy general manager ofFNB. “We offer different products from the plain vanillaproducts on offer.”
But, such advertising splurges are not seen as overlysound, some bankers say, given the outlay in relation to thereturns.
“These advertising campaigns cost a huge amount of money andthe products are not profitable per se, they are better forimage building,” said Salim Sfeir, chairman-general managerof the Bank of Beirut.
For banks not in the top 10, brand building is essentialto attract more local customers, but given the economicconditions, this is proving difficult.
“This year, there will be no growth in the economy, maybe1%. We need stability to promote products and grant loans.You cannot have a prosperous banking sector if there is apoor economy, and vice versa,” said Azar.
As a result, most commercial banks are now focusing onprivate banking, wealth management and insurance todiversify their portfolios.
“We want to establish private banking and investment bankingas we believe markets are not accessible enough. This isstill lacking in the economy and something to be developed,”said Tarek Khalife, chairman-general manager of CreditBank.
FNB is also looking to expand its investment portfoliothrough its 60% ownership of the Middle East Capital Group.“The time is not good for investment banking services, butonce back to normal there will be plenty of opportunities,”said Mortada.
Credit and charge cards are also a growing segment forbanks, with the number of cards issued surging in the lastfew years as electronic payments become more widespread.
“Until three or four years ago people paid cash, but now useelectronic transfers. That has increased the bankingpopulation,” said Anwar Jammal, Chairman and CEO of JammalTrust Bank (JTB).
Banks have adopted the same strategy to market cards as inthe West, using point reward schemes, free insurance,mystery prizes, and by teaming up with mobile phoneproviders to offer free calls.
Banks are, however, essentially chasing a limited numberof economically viable clients, prompting some institutionsto cater to small- and medium-sized enterprises (SMEs) andlower income customers.
“The possibility for expansion within Lebanon is somewhatlimited if you just go by head count. How many of the fourmillion are bankable?” questioned Jammal. Indeed, with anestimated 60% of the country’s wealth in the hands of 6% ofthe population, serious increases in GDP per capita areneeded for the sector to take a closer interest in theoverall population.
JTB itself is focusing on the SME sector, which now accountsfor 85% of the bank’s clientele.
Personal vs. automated
There appear to be two schools of thought in Beirutbanking circles about how to expand and reach morecustomers. One school favors bricks and mortar, as Jammalput it, investing in new branches in the less banked areasof the country and in the capital.
“The aspect of face-to-face interaction with clientele isvery important. The click entity doesn’t work, you need abrick and mortar entity,” said Jammal, citing thedifficulties British banks had that went the solelyautomated route.
The other school has embraced a mix of automated andpersonal.
“A physical presence is important, but penetration of themarket is not necessarily through banks. In the developedworld, it is less important, and this is where we think theindustry is going,” said Mortada.
The number of FNB branches has soared from four to 18 inthe last six years, and more are planned.
“Having a physical presence helps but it’s not the only wayto have contact with prospective clients. Today, withelectronic banking and mass communications, you can attractclients by providing special customer services,” addedMortada.
BLOM, the Bank of Beirut and Banque Libano-Francaise areto open new branches in the coming months, with the majorityof banks also investing in online services.
Bank Audi plans to continue its expansion. “Every year wewill expand our network. The Lebanese banking market is seenas over banked, over banked in numbers, but explicitmeasures – accounts per household, banks per capita – youfind it’s not over-banked despite reaching a size large fora domestic economy,” said Baz.
From Basel I to II
The smaller banks that rely more on the personal bankingrelationship might suffer from the Central Bank requiredimplementation of Basel II by the beginning of next year.
The vast majority of banks are in the final stages ofimplementing the Bank of International Settlements’ RevisedInternational Capital Framework, drawn up in Basel,Switzerland last July to replace the 1988 Basel I Accords.
Basel II provides measures and minimum standards forcapital adequacy for banks to better handle risk, along withrequirements to implement compliance, under a three pillarconcept: i) minimum capital requirements; ii) supervisoryreview; and iii) market discipline to promote greaterstability in the financial system. The cost of implementingBasel II poses the main headache for the smaller banks.
“We expect more consolidation as a lot of banks cannotafford the system,” said Azhari.
Such costs will cut into profitability, and unless bankscan weather profit loss in the short-term, mergers or sellsout are likely for either regional Arab banks or the bigthree.
“We would like to consolidate further to leverage more outof our extensive branch network, and by increasing marketshare to 15% to 16%,” said Byblos’ Bassil.
Baz said that due to the high capitalization of Lebanesebanks, mergers and acquisitions will be kept to a minimum.“It won’t generate any systemic crisis in the banks. I don’tforesee any pressure at this level,” he said.
With banks nevertheless eyeing prospective targets, theCentral Bank should act pro-actively in anticipation ofpotential fallout from Basel II.
“The Central Bank and the authorities have a major role toplay now to revive law on mergers and encourage banks toundergo consolidation,” said Karam.