Q&A: Saad Azhari

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Relying entirely on organic growth of their business, BLOM Bank carried the baton of leading the Lebanese banking sector in terms of assets for more than two decades. As the creation of the Audi-Saradar Group is exerting consolidation pressure at the top of the sector, EXECUTIVE wanted to know how BLOM Bank views recent developments and if the bank is changing its strategies. EXECUTIVE asked and BLOM vice chairman and general manager, Saad Azhari, answered.

As the leader in the Lebanese banking sector, you have seen a new group emerging besides you, a competitor of regional format. How does that affect your plans and ambitions?

Our policy will not change, in terms of looking that we have a strong bank, that our assets are good assets, and making sure that our shareholders always get the best return. BLOM Bank has an important size in the Lebanese market and we achieved this in continuous internal growth over 40 years, which allowed us to contain costs. Our level of cost to income is extremely low. That is why we have the highest return on our equity, and the lowest cost to income ratio. And that is why we have also the highest rating. We are the only BBB+ rated company by ratings agency, Capital Intelligence.

What do you regard as the key factor enabling you to reach market leadership?

We achieved this position of number one because of the confidence of our customers and we have been number for over 20 years, since 1981. Our customers believed that we provide security and a good service, and came to us because of that. We are still continuing to grow at a rapid pace and increasing our market share, as our figures for this year show.

Did merger and acquisition projects ever play a part in your development plans?

I cannot hide that there were a lot of merger discussions between us and other banks. Frankly, we found that elements that we require were missing: either the price was too high or the quality was not good. We would definitely not buy a bank just to grow. Some of the banks we discussed with, both foreign and local banks, have been bought by other banks.

How do you view mergers in Lebanon in terms of their benefits to the bottom line of the banks that went this road? 

Figures talk. Compare the actual present size of the banks that merged with what should have been their size, and look at BLOM. If you compare the risk profiles and look at profits of BLOM and the profits of banks that have merged, you will see that BLOM has the highest level of profits, even as it does not have the highest level of loans. Here you have high profit and low risk. What is better: high profit and low risk or high risk and lower profit? You judge for yourself.

If a new merger or acquisition prospect would enable you to ascertain the status of largest bank in Lebanon, would you pursue it more actively than in the past?

No. Our strategy will not change. For any merger to happen, it has to be sure that the quality of our assets will not deteriorate and that it does not negatively affect the return to our shareholders. Those are the essentials for us. We want to stay a strong bank with the highest rating in Lebanon. It is also very important to us to be able to give a good service to our customers.

Would you consider a merger as means to facilitate regional expansion?

BLOM Bank is the Lebanese bank with the strongest presence abroad. We have a subsidiary in Paris, which has branches in London, Dubai, Muscat and Sharjah. We have an offshore in Cyprus and we have constituted a bank in Syria where we have management control. We are also opening a branch in Jordan. We are expanding wherever we think it is possible and interesting for us.

It is often said that Lebanese banks need to be stronger and considerably larger in size to successfully compete in the region. What is your perspective on this?

I think that the size of the banks in Lebanon compares well to banks in the region. Compare the size of Kuwaiti banks and Lebanese banks, for example. The assets and deposits in Lebanese banks are almost twice of those in Kuwaiti banks. The banking sector in Lebanon is number three in size in the Arab countries, after Saudi Arabia and Egypt. Lebanese banks are growing larger and larger and today have large asset volumes. For example, we ourselves have passed $9 billion in assets. Our size is large compared to the economy and with our shareholders’ equity; we are over capitalized when compared to the risks on our balance sheets. We already have a good size compared to the region, we are able to have a presence outside and we have the possibility to expand.

So you do not consider large regional banks as having a size advantage over BLOM and other Lebanese banks?

Many Arab and foreign banks have a presence in Lebanon. Lebanon is an open market, while some regional markets are closed to us. I think we have a future advantage as these markets are opening up. Jordan is an example. Before, we could buy a bank in Jordan but not open a branch. As this has now been allowed, we are opening a branch there in September of this year. Lebanese banks have important opportunities in the region and I hope that we will be playing a much more important role in future.

Where does BLOM set priorities for domestic development?

We at BLOM have seen important growth in corporate banking and also in retail banking. This is for specific reasons. Retail is still a developing sector, where all banks increased their activities. In corporate lending, big corporate names here were historically mostly dealing with foreign banks. Some foreign banks have already moved out or are planning to move out of Lebanon. BLOM saw this opportunity. Last year, we created a corporate unit and effectively grabbed an important amount of clients that used to deal with foreign banks, which either left or are scaling down their portfolio, mostly because of Basel II and the strategy of international banks to reduce their exposure to emerging markets. That is why our loan portfolio had a good growth in lending last year, even though the lending in the Lebanese market was generally stable.

What is your ratio of non-performing loans?

The non-provisioned non-performing loans stand at less than one percent, 0.5 to 0.6%.

How important are private and investment banking in your activities?

In Lebanon, private banking is generally very limited, frankly speaking. You cannot strengthen private banking much, especially because of the taxes that the government collects on interests on international bonds. The big private banking activity is done by our subsidiary in Geneva. We have an investment bank that is mostly specialized in medium and long-term lending. Corporate and retail are expanding at a faster pace than other activities, but we are working in all activities.

Have Lebanese banks improved as much in non-balance sheet capabilities and quality as they grew in terms of balance sheets?

The services given by banks have improved a lot over the past years. Before, you had to deal with three or four people at a bank branch, to undertake an operation such as depositing a check or transferring money. Today some banks, including ourselves, have a teller system, in which one person can facilitate your operations. Secondly, delivery channels and their variety improved a lot. Before, the only option was to go to the bank. Today you can use ATM, phone banking, internet banking, and the call center. In standard of services, Lebanon has arrived at a very high level in worldwide comparison. You cannot see this from the balance sheet but you can see it through the operations, dealing with the bank.

Do you expect the banking sector to continue its first quarter good performance in the remainder of 2004?

It will definitely not be an easy year, because the treasury bills that Lebanese banks had bought before Paris II, especially in September, October, and November of 2002, will all mature by end of 2004. Those treasury bills carried a high interest rate and banks hold a large number of them. The renewals will be at a much lower rate. Secondly, we have to put a legal reserve of 15% of our US dollar deposits at the central bank. A central bank circular in 2002 asked banks to deposit a certain level of their dollar reserves for two years with the central bank, at interest rates that first stood at 9% and then were lowered to 8.75 % at the end of 2002. These two-year deposits are all maturing and will be replaced at a much lower rate. Banks thus are definitely going to be squeezed on those interest margins.

How about deposits by Arab investors?

We are continuing to see an important growth of deposits coming towards Lebanon from Lebanese and Gulf countries, and the pace may be a bit higher than last year. This is a good sign of confidence. We are also continuing to see interest in different projects. I have recently been in Kuwait and met a lot of people who are interested to buy homes in Lebanon. And some of the big groups there want to undertake important projects here. The same is true for groups from Saudi Arabia and the Emirates.

So overall, your expectation for 2004 is for a smooth year?

In general terms, 2004 will achieve a good growth of deposits and assets for the banking sector in Lebanon. There is going to be more pressure on banks in terms of profits towards the end of the year, and perhaps there will be a slight decrease in profits. We will not see a repeat performance of 2003. It would be good if banks can achieve stability of profits, which is a little difficult. Banks are expanding and all banks are trying to increase their market share and there is more competition. Overall, I don’t see any troubles in 2004.

Thomas Schellen

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