Counting the profits

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The position of modern banking in the global economy vastly exceeds the main functionality that banks fulfilled during their 600-year rise since the Medicis: financing trade and warfare and serving as safe havens in times of danger. The expansion of banking and finance into universal socioeconomic denominators has come at the price of intense interdependence with national fortunes and developments outside of the safety and confinements of the bank vault. A few years ago, technology issues dominated many discussions over future banking trends. But talking global about banking today, three universal issues come to the fore that concern bankers and stakeholders, regardless of the development level reached by their national banking sector: crises, concentration of power and convergence of standards.

Banking crises are the nightmares of financial stability and big, sector-wide crashes – or, in technical terms, systemic banking crises – tend to occupy media reports and discussions over years. The Russian and Argentinean crises, for instance, are frequent examples in business stories and learned discourses alike.

Surprisingly, systemic banking crises do not crop up far and wide apart. For the last quarter of the 20th century, World Bank researchers diagnosed 113 systemic banking crises in 93 countries. Wars, loss of government credibility, transition from communism and other sweeping changes in political systems, financial and general market upheavals have been identified as leading causes for these epidemic cases of banking malaise – plus, in another main cause, interventions by international financial institutions (namely IMF and World Bank) set off numerous outbreaks.

According to the historic research, Lebanon experienced one war-triggered systemic banking crisis between 1988 and 1990, with four insolvencies and 11 banks coming to depend on central bank bailouts. But while the country continues to receive warnings of another potential systemic crisis, the general international and local consensus is that the danger is minor, and Lebanon’s bankers do not rip out their hair in fits of crisis fear. As far as crisis candidates are concerned, the banking industry in China’s overheated economy today is the focal points of worries.

Concentration is the other inescapable reality, with larger and larger mergers. Between January and May 2004 alone, four, billion-dollar bank merger projects were announced in the US, the latest and smallest of them valued at $7 billion, between regional players SunTrust and National Commercial Finance would create America’s seventh-largest bank with $148 billion in assets. The $10.5 billion acquisition of Cleveland-based Charter One Financial by the Royal Bank of Scotland illustrates a recent trend of European banks to buy American. Even Germany’s Sparkassen, a conglomerate of savings institutions with entrenched provincial high street image, last month started talking about becoming “global players.” Lebanese bank mergers, although puny by comparison, follow the same logic, which is not abating.

Last but certainly not least, actors in national banking industries are coerced to increasingly adjust to standards that are streamlining their operations to meet the economic and political codes of the world’s leading powers and international institutions. The Basel II rules of the Bank for International Settlements (BIS) and the money laundering regulations by the OECD-created Financial Action Task Force (FATF) are the crucial determinants for accelerating uniformity in global banking.

Since its inception in 1989, the FATF has progressed and significantly expanded its influence especially in the last five years. Lebanon got a strong dose of FATF experience when it was placed on the organization’s non-compliance list in 2001 and had to make legislative and institutional efforts to be removed in 2002. The countries collaborating on the issues of combating money laundering and terrorism finance through the world’s financial networks have just extended the FATF mandate until December 2012. Although the May 14 decision spoke of a temporary mandate, this looks pretty permanent. Authorities and bankers in Lebanon, thoroughly committed to safeguarding national capacities as banking center, know that they have to satisfy the new global rules against money laundering and terrorism finance, just as much as they have to gear banking performance up to meet the Basle II standards over the next few short years.

Against these global macro trends, current concerns in the Lebanese banking industry are at the same time relaxingly minor and yet illustrate the need to embark on further qualitative development efforts. If the 2003 and first quarter 2004 performance of Lebanon’s listed banks were reported in a developed stock market, a rally of banking values would be as safe a prediction to make as one ever could in the craft of market guessing. The results of the Lebanese banking sector for the past 12 months were simply beyond expectations, with the numbers for the six listed banks speaking loudly.

The published balance sheet of Banque Audi, the bank at the center of attention since their successful merger deal with Banque Saradar, recorded 35% growth in total assets over 12 months ending March 31, 2004, to $7.51 billion. This increase was equaled by Audi’s 35.4% gain in customer deposits. At $6.29 billion in customer deposits, the bank’s market share of total banking deposits reached 12.7%.

Net income at Banque Audi for the first three months of 2004 was $14.5 million, an improvement of 13% on the same period last year. According to a Banque Audi press release, these figures are in line with quarterly result averages of 2003 and reflect the bank’s position without including figures for Banque Saradar following the rapprochement between the two entities.

BLOM Bank, the leader in terms of total assets, continued their growth with a 22% increase in each, assets and deposits to $9.2 billion and $8 billion between the end of March 2003 and end of March 2004. BLOM net profits for the first quarter of 2004 amounted to $22.4 million, up 0.9% over Q1 2003.

Assets of Byblos Bank climbed by 13.6% to $6.2 billion over the 12 months ending March 31, 2004, and customer deposits rose by 16.3% to $5.1 billion. The bank achieved a net income of $10.3 million in the last quarter. This marked a drop of 12.7 % over the same period in 2003, which the bank attributed to a tightening in its net interest margin from 2.63% to 1.81% between the two periods, due to its “conservative strategy to keep highly liquid assets.”

At Bank of Beirut, improvement of assets was by 11.3%, to stand at $3.66 billion at March 31, while customer deposits rose by 15.1% over the past 12 months, to $2.56 billion. BoB achieved net profits of $4.8 million for the first quarter, a gain of 14% over the same period in 2003. BLC Bank succeeded in achieving assets of $1.62 billion and customer deposits of $1.33 billion at the end of March, improving by 27.7% and 26.3%, respectively, from March 2003. Under the central bank-installed new management, BLC reported an increase of almost 93% in its gross income at the end of the first quarter and an unaudited net income of $3.55 million, a turnaround from a $2.1 million loss in Q1 2003. Non-performing loans still accounted for 78.5% of BLC’s total loan portfolio of nearly $720 million. BEMO Bank recorded an increase in total assets of 12.7% year-on-year, to $562.4 million at the end of March, with customer deposits growing by 9.2%, to $432 million. Net income at BEMO was $1.06 million in the first quarter, which signified a noteworthy increase of 50.9% over Q1 2003.

In summary, the banking sector performance clearly defied cautious predictions made by experts one year ago. “Banking performance has been more satisfactory than I projected, because resources from investors increased by 14%, a fairly significant amount under the climate we are in,” said Marwan Iskandar, one of Lebanon’s leading economists. He attributed the sector’s good results largely to Arab investors “who find it convenient to place some money in Lebanon.” Several major ventures brought funds into the country, notably the Sannine Zenith project whose land purchases had been undertaken mostly in 2003, Iskandar added.

A leading banker agreed that sector results beat forecasts but cautioned, on condition of anonymity, that first quarter profit statements of some players might show strong increases only based on their revaluation of eurobond assets. “Most Lebanese banks hold eurobonds to maturity. By revaluing eurobonds as market-to-market, banks can state profits instead of keeping them hidden – but these are one-off gains,” he said.

Banking analysts also reiterated the long-standing admonition that the, albeit substantially diminished, possibility of sovereign insolvency would be extremely dangerous for many of Lebanon’s large banks. They still have 30% to 35% of total balance sheet exposure to government debt, meaning, “if the currency collapses, all are in trouble.” But these realities can be quite safely considered to be non-threatening to the development of the banking sector at least in the near future. In the opinion of Iskandar, there are no reasons to anticipate any major worries in the Lebanese banking industry for 2004, as the crisis over Bank Al Madina has been largely resolved and the formation of the Audi-Saradar Group created the basis for a major Lebanese financial institution with regional and international reach. The sector could even witness another step in the evolution of massive banking power, Iskandar said, pointing to “serious discussions” as ongoing between the Audi-Saradar Group and Banque Libano-Francaise for yet another big merger move.

The majority shareholder in BLF, French banking group Credit Agricole, has for some time been known to seek to reposition their involvement in Lebanon. BLF, one of the five first banks in the country, had already twice been engaged in merger discussions in the past three years – once with Banque Saradar and once with Banque Audi.

Also for near-term fund inflows, Iskandar maintained a strong outlook. “Indicators for inflows of Arab money are promising this year, perhaps slightly better than last year,“ he said.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail