From foggy to cloudy

Banking development opportunities for 2018 suffer from opacity and uncertainties

Photo by: Greg Demarque/Executive
Reading Time: 14 minutes

Ethereal. Ephemeral. Elusive. ETP, perhaps. Questing for upcoming banking-sector development opportunities in 2018 brings a whole palette of e-words to mind, including the “e” in ETP (electronic trading platform), but not the favorite e-word of marketers and their PR minions: exciting. 

It seems that development opportunities in the banking sector are increasingly scarce, partly, of course, because good opportunities are by definition those that are not obvious to all, but also because the business of banking is facing new pressures all around. Before the decade is out, 2017 and 2018 might count among years that drove this point further home.

Earlier in the 2000s, during the quasi-mythical days before the Great Recession, development logics for large Lebanese banks seemed compelling. One strong strategy calculation for a growing top bank was to go cross-border, leverage your comparative advantage of the sophistication of Lebanese financial industry knowledge in conjunction with your cultural proximity to other countries in the wider region, and deploy your accumulated financial ammunition outside of Lebanon to avoid putting pressures on the home market.

Another famed strategy for development was to tackle underserved but potentially profitable market segments, such as private banking, or to find other untapped and potentially lucrative market niches (which, for example, does not apply to efforts for inclusion of the unbanked poor, a segment that is ridiculously underserved in overbanked Lebanon but not intrinsically lucrative).   

During the past year, big headlines about international expansions or takeovers of foreign banks by Lebanese lenders were scarce—with the one notable exception of an acquisition spree by Societe Generale de Banque au Liban (SGBL) and its chairman, Antoun Sehnaoui. SGBL made news over the acquisition of two entities from one banking group in Europe in December, and Sehnaoui was reported to have acquired a small bank in Colorado, United States, in mid-year. Overall, however, most news from local banks shown on the website of the Association of Banks in Lebanon in 2017 or reported in Lebanese media focused on corporate social responsibility, and querying top bankers about development strategies at the end the year felt like pulling teeth.

Understandable hesitancies

Put into national and global contexts going into 2018, however, any banker’s hesitancy in declaring new development opportunities is as unsurprising as reluctance in the face of painful dental procedures. Foggy perspectives, first of all, afflict the Lebanese economic and financial environment, due to the local political climate. That point has been demonstrated indisputably in November of 2017 to all who even might have dared to dream differently.

Foggy perspectives intrude equally, however, from the global economic-policy environment. The impairments of vision in this regard relate to long-standing debates over banking rules and policy twists in the United States, among other things. This is not just about Hezbollah-bashing legislation from American lawmakers but also about legislative measures with global economic implications. At the end of 2017, there is no apparent certainty about the future regulatory climate in US banking, although this climate is widely assumed to become friendlier for financial corporations. In spite of this policy expectation, there certainly are some mixed international impressions of movements on the US regulation and deregulation front—buzzword  Dodd-Frank—which are certain to influence banking internationally.

A December announcement about a reform agreement on the Basel III rules by the Bank for International Settlements (BIS) also tended to leave its own space for ambiguities. The final reform framework for the 2010-initiated Basel III package aims, as BIS states, “to restore credibility in the calculation of risk-weighted assets.” Titillations linked to this reform will quite likely be limited to central bankers and experts in advanced financial accounting, but one noteworthy facet of the package is that it gives countries and banking institutions extended deadlines before the announced reforms come into effect in 2022 and have to be fully implemented in ten years.

More relieving for concerned central banks and government treasuries than the timeframe might actually be that the reform package does not talk about risks when it comes to sovereign bonds. These will still enjoy statutory innocence on bank balance sheets and will be zero-risk assets, since the insolent idea that sovereign bonds could behave any other way was not approved by the Basel committee, which includes central bankers and government-appointed regulators from 28 jurisdictions and operates on a consensus principle. 

Next, the changes in the US taxation system, which are yet to be adopted and signed into law at time of this writing, have economic and equity market implications of uncertain magnitudes and directions in the horizon for the coming few months. Some European bank economists described the corporate US tax cuts in their 2018 outlooks as pro-market and not yet priced-in in December 2017, but the prospects of these cuts also caused some vocal concerns among government economists in the major European export power, Germany.

On the political level, prospects of risk were stoked significantly at the end of 2017 by the ignominious Jerusalem decision by the US president. Such a move can only serve to remind humanity that wars in history have been triggered—if not caused—by irrational elements, from deliberate insults of national pride to football games. Especially from a vantage point in the Eastern Mediterranean, the move is a painful reminder of the recurrent misperception of man as rational being. Optimistic concepts of eternal peace as based on enlightened treaties, or as capitalist peace predicated on the global spread of a fast-food empire, have unfortunately not proven sustainable, Mr. Friedman, just like the idea that no honorable journalist of our times could ever debase himself as a sycophantic scribbler.

[pullquote]Prospects of risk were stoked significantly at the end of 2017 by the ignominious Jerusalem decision by the US president[/pullquote]

Even without a clear understanding of the regional pressure experience from bilateral Saudi-Iranian rivalries in the Middle East, which the risk quarterly of Aon, the international insurance intermediary, in late November 2017 categorized as “the major driver behind the general increase of risk in the region,” it is very hard to ignore the impression that more tinder is piling up in the world’s number-one tinderbox. Who can think about development opportunities at such a time? 

Thinking about the overall uncertainty at the end of 2017, one might finally want to cast a questioning eye on market expectations for the coming year. These are generally optimistic in tenor, even if curiously worded—like one from Bank of America Merrill Lynch (BofAML), a leading wealth-advisory and asset-management player, which titled its 2018 Global Markets Research Outlook, “So bullish, it’s bearish.” But bullish indeed is the consensus of the analyst herd, and the picture is similar even from the watchdog of the developed economies, the Organization for Economic Cooperation and Development (OECD).

From the lofty vantage points of all-impressive charts, the OECD hints of raging economic bulls across member countries. In one OECD powerpoint, economic outlook projections for real GDP growth rates in 2017, 2018, and 2019 by the organization feature 39 arrows of the up, down, and flat varieties for the world, the Euro region, and individual member countries. Of the 13 arrows for 2017, 11 point up versus two year-on-year downers (UK and India). Of the arrow sets for 2018 and 2019, year-on-year development projections for 2019 have 11 down arrows, but when one compares the forecasted growth rates with the 2016 actual rates, each of the three years in the projection timeframe is overwhelmingly up.

That is to say, relative to 2016 actual, projected GDP growth rates for OECD countries are flat only three times. Seven of the 39 arrows point down. That leaves 29 upward projections across the economically dominant part of the world in this and the next two years when compared with 2016. This is scary.

On one probably heuristic level in this writer’s mind, the unscientific scare factor is that overwhelmingly bullish expectations for a coming period in the global economy are associated with years that turned out as leading down to quite the opposite of dominant expectations, like 1928 and 2006.

[pullquote]Seven of the 39 arrows point down. That leaves 29 upward projections across the economically dominant part of the world in this and the next two years when compared with 2016[/pullquote]

It is difficult to forget that in 2006, the IMF opined in the foreword of its September World Economic Outlook (WEO), “Our baseline is that world growth will continue to be strong.” This confident assertion was followed by the fascinating (and bullish) assurance in the April 2007 WEO that “continuation of strong global growth” was the most likely scenario, because risks had declined from the previous year, and compared to six months prior there was “less reason to worry about the global economy.”

What differed markedly from these opinions was not merely the April 2008 WEO acknowledgement that “the world economy has entered a new and precarious territory,” but rather the entire geo-economic experience of the years that followed.

If we pivot back to current 2018 views, Copenhagen-based international trading specialist Saxo Bank at the end of November confessed to having a contrarian view on global growth in 2018 vis-à-vis an overly rosy consensus among financial augurs. Saxo enigmatically opined in its global macro outlook that “2018 is certainly the most favorable occasion for a bubble burst since 2007.” Open warnings seem to be out of favor with analysts this year, but is an overall aversion to trouble the waters more on the good or on the bad side as far as predicating existing trends? 

What works?

From an emerging-markets angle, beyond general intuitive uneasiness it might be a rational fear that things that are good for the big players in the global economy do not have to be in the best interest of countries that comprise the precariat of the global sphere in terms of their absolute shares in world GDP. Usually, these countries do not even appear on index radar screens as frontier economies. This differential between analytics of the global and local could mean that consultation of crystal balls and tarot cards are superior to arduously googled research papers and outlooks by leading international-bank economists. Or, at least, it could mean that inquiries of what worked in 2017 for the top Lebanese banks are preferable to the assessments by their foreign peers who do not have Lebanon in the center of their analysts’ radar, or anywhere else on their research screens.

So what did work for the Lebanese alpha banks with deposits in excess of $2 billion in 2017, and thus might also help them to rich harvests in 2018?

BLOM Group, Lebanon’s runner-up in banking power and winner of 20 different accolades in various financial award categories in 2016 and 2017, according to its website, said in a November 2017 blog entry by its Blominvest unit that over the first nine months of 2017, BLOM Bank “attained the highest level of operational, non-exceptional net profit” and also topped the ranks of the four listed Lebanese banks in two crucial return ratios.

“BLOM Bank recorded the highest [return on average common equity] at 16.93 percent and the highest [return on average assets] at 1.55 percent,” the entry read, before adding that the percentage growth of assets and the lending portfolio at BLOM—with asset growth of 7.7 percent and loan growth of 6.4 percent in the first three quarters of 2017—was higher than that of its listed peers, AUDI, Byblos, and Bank of Beirut.

Asked what was behind the bank’s success leadership in 2017, Saad Azhari, BLOM Group chairman and general manager, explains that the bank’s growth in assets and deposits as well as its higher loan growth than the sector was “definitely linked to the acquisition of the HSBC loan portfolio, which added about $500 million.”

While the acquisition of HSBC Middle East, which BLOM officially announced in November 2016 and completed in June of 2017, did not greatly boost BLOM in size, it was very beneficial for the group’s trade-banking activities, where it facilitated a strong increase in commission income from letters of credit (LC) and letters of guarantee (LG). According to Azhari, the acquired HSBC Middle East business adds some 2 to 3 percent to BLOM’s business, “but in terms of commissions on LCs and LGs, the increase is about 50 percent of the consolidated BLOM activity in this area, and when taken for Lebanon alone, the volume of LG [and] LC was doubled,” he says.

Some processes and digitization at BLOM could also be improved through integration of HSBC staff, and BLOM also succeeded in retaining a very high share of the acquired customer base. “The add-on to profitability is also good; while the size of HSBC portfolio is small, it will add to profitability in future,” Azhari acknowledges, adding that the acquisition worked “overall better than expected.”

[pullquote]2017 was a year of subdued appetite for growth among all Lebanese banks[/pullquote]

When asked about the best development prospects of Lebanese banking going forward, Azhari pointed to the inopportune timing of such considerations in the politically charged month of November 2017, and expressed hope that the problem would be temporary. As positive general perspectives, he cites the oil and gas sector, as well as bank investments into tech entrepreneurship under Circular 331, from Banque du Liban (BDL), Lebanon’s central bank. Granting oil and gas licenses “will definitely open new doors, as there will be companies that will be suppliers and services providers. This activity will boost investments, so I think the oil and gas sector will be an important sector for the future,” he says.

In the view of Freddie Baz, vice-chairman and chief strategist of Lebanon’s largest financial entity, Bank Audi Group, 2017 was a year of subdued appetite for growth among all Lebanese banks. He points to challenges in the two main countries with a Lebanese banking presence abroad, Turkey and Egypt, to explain why pursuit of growth in the external markets was less vigorous than in some previous years. “Both countries are facing many challenges. These challenges are of [a] short-term nature, but short-term strategies [for foreign operations of Lebanese banks] are much more in a consolidation mood than in growth mode,” he explains, adding, “At the same time, in Lebanon, we are seeing a lot of volatility and many unknown parameters. They do not exist to the extent of generating big fears and concerns, but people want to see improvements. These are again being delayed; the situation is delaying, delaying, delaying.”


Emphasizing that Lebanon’s performance over the past 25 years is likely to be underestimated in comparison to other Arab countries, Baz points out, “For reasons of Lebanon’s sectarian dimensions, sensitivity toward regional conflicts is probably the highest among peers in the region. But amazingly, when you look at the long run, there are interesting numbers concerning growth.” He cites recent studies conducted by Bank Audi’s economic research team under Group Chief Economist Marwan Barakat, which show that average annual GDP growth in Lebanon is in the 4 percent range in the past 27 years and, compared to the region, only 20 or 30 basis points lower when viewed over long periods (from 2000 to 2017 in the first comparison, and from 1990 to 2017 in the second comparison).

What impacts the perception of Lebanon are long-standing but largely consistent risks and the presence of high volatility. “The bottom-line reading is that Lebanon gets affected by regional conflicts and domestic difficulties much more than the region, but its capacity to rebound is also much faster. The volatility is high, but in the very long run, Lebanon always catches up,” Baz says.

The perception of Lebanon as especially risky or slow in economic development and political economy might explain many unfavorable perceptions of the nation and its financial industries among the country’s residents and foreign observers, including perceptions of measures relating to the overconcentration of the monetary side in the national mix of fiscal and monetary policies. In 2016, the best things that happened to the banking sector arguably were the central bank’s unconventional measures, driven by BDL’s desire to fill up its vault with foreign-currency reserves, which was explained by the central bank as a measure in the national interest.

It is undisputed that this unusual financial engineering translated for commercial banks into a year that was described with epithets from atypical to significant, but it was not so much by their own initiative as by their willing and skillful participation in the central bank’s scheme.

One of the possible macroeconomic advantages that the World Bank’s Fall 2016 Lebanon Economic Monitor envisioned as result from the 2016 financial engineering was “a positive impact on private lending and, thus, economic growth” from the rise in Lebanese lira liquidity at the commercial banks, contingent on “sufficient demand for the additional liquidity in local currency.” (This was the only advantage noted by World Bank economists with respect to the macro economy, versus four disadvantages.)

In September 2017, Bankdata, the analyst firm and banking consultancy, noted, “It is worth recalling that Lebanese banks are increasingly benefitting from the stimulus packages of the Central Bank of Lebanon providing interest incentives for [Lebanese lira] lending over and above an increasing liquidity in LL which is being more and more targeted toward lending at competitive rates.”

Analyzing alpha bank lending trends over nearly seven years, from December 2010 to September 2017, Bankdata told Executive that annual lending growth in the period was highest in 2013, with $7.3 billion in additional loans, while observing that “the pace has slowed substantially since December 2015, with additional loans of $2.6 billion over the past 21 months.” According to the analysis from November 2017, alpha banks’ overall loan portfolio “stood at $35.8 billion at year-end 2010, and reached $66.5 billion in September 2017, an incremental $30.7 billion, of which 70 percent or $21.4 billion [was denominated] in foreign currencies and $9.3 billion in local currency.”

The share of local-currency loans in the total rose steadily from around 15 percent at the beginning of the period to 22 percent at its end, the consultancy said. By type of loans issued over the past three years, corporate loans represented 40 percent of the overall portfolio, according to Bankdata, and reached almost 50 percent when counting commercial real estate loans. Small and medium-sized enterprise (SME) and housing loans each accounted for around 15 percent, and retail loans for 12 percent of the total. 

Not the time

As the two top bankers, Azhari and Baz, both emphasized, the purpose of the financial engineering of 2016 was to improve dollar reserves at the central bank and simultaneously increase the equities of banks. “Considering the high cost of attracting dollars, the purpose of the financial engineering was not to increase lending,” Azhari says.

Baz notes that banks amassed large amounts of liquidity through the financial engineering, which they absorbed, and that any offer to lend lira at good rates was the result, but not the target, of the engineering. “The result of the engineering was increased liquidity, and banks had to use this liquidity. This is notwithstanding the notion that we need at a certain point to de-dollarize our economy, but this de-dollarization cannot start before fundamental imbalances are adjusted,” he says, referring to Lebanon’s deteriorating capital stock and dependency on inflows, which he characterized as a form of the resource curse. 

Pointing to high correlation between GDP growth and loan growth in the country, he refers to the sluggish economy as related to the equally weak loan growth in 2017. “In Lebanon, additional lending in the economy is commensurate with 1.5 to 2 percent real GDP growth. If you want to achieve 5, 6, 7 percent, you need to double the amount of lending,” he notes. When one puts all this into context of economic pressures experienced by Lebanon from 2011 till today, one sees the role of the BDL measures as positive, when Governor Riad Salameh was faced in 2016 with a weakening balance-of-payment position at a time when money inflows could be mobilized.  “One needs to take money when it is available, because when one needs it, one may not find it,” Baz says, adding that in his view, debates over the cost of the measure were missing the point of comparing the cost of such an adjustment with the cost of a social crisis that could result from not undertaking it.

Looking into virtual opportunities

The sum of volatile economic realities in Lebanon, global uncertainties, and ever-more-complicated regulatory and operational environments for the banking industry in the country might leave the 21st century’s digital frontiers as only the palpable frontier of banking opportunities. Frontiers are always good for adventures and opportunities. They lead to unknown and perhaps even virgin territories, although the natives might object to the viewpoint. But there are no natives on the other side of the digital frontier (one assumes) and that makes it doubly attractive to venture into digital exploration.

The drawback is that the digital realm is not so new and untouched as it was 20 years ago, when the first wave of new finance settlers ventured there during the first bubble phase of the internet revolution—and soon beat retreats after the burst of the bubble, at least from the concept of “online-only” banking. More than 15 years after the burst, the internet is a standard banking channel and IT investments, online services, and cybersecurity for banks present themselves as must-have development obligations. Just as a bank operating during the Industrial Revolution needed to invest in a building, a counter, and a vault, banks in the current age need to have online services, advanced IT, and powerful cybersecurity. Lebanese banks have allocated investments to their IT departments, from upgrading core systems to adding new processes, they flaunt their online services and are aware of the cybersecurity issue (although it has to be noted that the legal and technical cybersecurity framework in Lebanon is still in considerable need of development on national level).

[pullquote]Banks in the current age need to have online services, advanced IT, and powerful cybersecurity[/pullquote]

The frontier adventures of 2018 and the next few years might be hidden in the jungle of cryptocurrencies, as the bitcoin-mania at the end of 2017 underscores. However, the path into this territory does not yet appear all that clear. Salameh, who in the past few years had been criticized by financial-tech entrepreneurs for blocking the concept of cryptocurrency adoption in Lebanon, recently readjusted his outlook and started talking about a sovereign digital currency, for example, at a cybercrime prevention conference in November. However, it seems that the Lebanese banking sector still has to tune its sensors to the cryptocurrency and distributed ledger technology, not at only in development practice but even in concept. BLOM Chairman Azhari enthused to Executive that the bank already has its version. “We ourselves, if we can say so, have a virtual currency, our golden points. It was started before [the topics of Bitcoin and Blockchain came into existence] and our customers used their golden points to buy merchandise all over the world.”

Loyalty points, in technical terms, are known as tokens. Under a well-established concept they are used by many consumer focused companies, including retailers, airlines, and banks, and they have a specific purpose: to reward and enhance customer loyalty, duh. Importantly, the issuers control their generation, distribution, value, and shelf life. This limits their qualities as fungible, transferrable, or tradeable digital means. Cryptocurrencies and their safety features (the blockchain) are generally designed to be tradeable, have unlimited lifespans, and are thought of as fungible.

The concept of a digital sovereign currency in Lebanon under BDL supervision comes with many questions. Moreover, the timeframe for any adoption of such a scheme is yet to be determined—and if the time that has passed since the first reference to an ETP in a public speech by Salameh is any reference, nobody needs to trouble their mind over a sovereign or any other cryptocurrency in Lebanon for a few years yet. For Audi’s Baz, the much hotter agenda item for Lebanon is the creation of the electronic trading platform (ETP) attached to the Beirut Stock Exchange. “Digital currency talks are very premature for Lebanon. In my opinion, the ETP is more important, and the [BDL] governor is keen on developing it,” he enthuses, adding that not mere words but real action has been dedicated to the establishment of an ETP in the Lebanese context, and needs to result in more concrete steps. 

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