If the creation of the Audi-Saradar Banking Group was the banking event of 2004, BLC Bank is the bank that has arguably made the most progress in 2005. In economic terms, the role of BLC Bank might be as remarkable or unremarkable as that of any other Lebanese bank of similar size in the sector, in which it ranked 12th by total assets and, with customer deposits of $1.52 billion at year-end 2004, rating highly in what is lately considered the Beta Group of banks (deposits between $500 million and $2 billion). At such a ranking and size, a player is significant enough by the proportions of the domestic economy but would make for not much more than a wallflower in the dancehalls of regional and international finance.
Furthermore, BLC’s growth prospects are not obviously apparent, while, if the truth be told, the fate of BLC Bank is still undecided at time of this writing. Within the next few months, it could be acquired by a foreign bank or by financial investors. It could continue to grow as a stand-alone operator. It might even be merged into a competitor in the banking industry’s consolidation game and become a footnote in another bank’s history, although today that seems less likely an option.
Why then should BLC be the object of this reporter’s admiration? It has achieved good growth and strong improvement of net results between 2003 and 2004, but that is not in itself all that unusual in the sector either historically or in the past year, which the annual Bilanbanques publication just called “a good year” for the industry, with a growth in banking activity of 14.5% when measured by the evolution of total assets. Reporting asset growth of 23%, BLC Bank outperformed the sector but did so very much within the margins of reason. What is remarkable is what BLC is not: with 2004 profits having nearly tripled to $15.9 million from $5.5 million in the previous year (and after having overcome balance sheet losses of $99.8 million in 2002) – it is no longer de-facto bankrupt. The element of fascination with BLC is that it is the story of a turnaround, an achievement that the Lebanese like to consider an inherent Phoenix-like quality within their business culture, that is, in reality more the exception than the rule.
The BLC story begins with self-induced misery. After more than four decades of existence as Banque Libanaise pour le Commerce, the institution had at some point slipped into a downward spiral of mismanagement. Doubtful loans abounded on its books, losses mounted year after year, rescue attempts failed, the bank went in vain through a number of lead executives, and morale was beyond redemption. Finally, the central bank stepped in. To avert ultimate disaster, it took over the reigns of the institution in mid-2002, assumed responsibility for its finances and installed a new management team under Shadi Karam, a finance and corporate rescue expert with international experience but little local clout who was chosen by central bank governor Riad Salameh to be chairman and general manager of BLC Bank. As Karam told Executive, when the central bank-appointed management team assumed its responsibilities at BLC Bank, it found a catastrophic situation. “It was a bank with a very high negative net worth. The level of accumulated losses was historical, plus the bank had dramatic structural problems,” Karam said. The bank’s books and inner workings in general must both have been a mess, with what Karam described as “lost files, lost promissory notes; you name it, we had it. Incompetence, internal feuds, absence of documentation, and absence of support systems – every major no no in the banking book had been committed in this bank and that had pretty severe consequences on internal organization, relationship with clients, internal department structure, and the quality of the files.”
The drama of a rescue operation is of course always the more captivating to the audience when the salvage effort begins under the most adverse of circumstances. But if in the case of BLC the emergency decision and takeover through the central bank would not already seem proof enough of the bank’s dismal state at the start of the century, the 2004 annual report still hints of the depth of the morass that had existed. Apart from communicating that BLC Bank’s ratio of non-performing loans had improved from a devastating 89% in 2003 to a still intimidating 66% in 2004, the report includes items talking of financial losses brought forward from previous years, settlement of debts by former senior executives of the bank, and contingent liabilities related to pending law suits. Equally telling of the contrast between past and present is that the annual report describes as recent the creation of such crucial entities as a management control department, an operations risk management function at the risk management department, as well as the issuance of an internal manual on ethics and compliance. On an informal level, seasoned employees at the bank’s headquarters confirmed that the atmosphere at the institution has incomparably improved over the state of affairs under previous managements.
Karam claimed that there was no single decisive factor in achieving the turnaround of BLC Bank, but qualities instrumental in pursuing the recovery spanned from creativity to massive determination, qualities that gave BLC an edge over other banks. “We developed new elements like micro-credit, mobile banking, advanced scoring systems, automation, and e-banking,” he beamed. In this innovative vein, BLC established a specialized credit section with the objective of providing loans to the small business segment of the economy as well as extending micro-finance services (with European help) to micro-entrepreneurs. The bank rolled out a mobile branch and engineered new products, the latest of them being a regional first, retail loan backing through a loss-of-income insurance, which was designed early this year in collaboration with Libano-Suisse Insurance. Structure implementation was another major part of the process. Installation of procedures and two dozens of internal manuals was a major achievement, Karam said. “Respect for procedures was something that was totally inexistent in the bank, and we think that procedures are really of primary importance.”
The determination to succeed on the other hand, took expression in BLC management’s ploughing its recovery furrow while ignoring the opinions of industry observers. In the bank’s policies and behavior, the determination led to what Karam called the “extensive and almost brutal fashion in which we worked on recovering most of the debts we had in the market. We were extremely aggressive in our recovery, so people took us seriously.”
In record time
This kind of ruthless credibility aided BLC in cleaning up its loan files at, under the circumstances, considerable speed, with a significant positive effect on its 2004 bottom line gains also through write-backs of earlier loan provisions. The studious provisioning could be a boon also in coming years due to further write-back potentials, said Karam, who was, however, fastidious on getting this detail across without allowing any speculation that the bank might have over-provisioned. “The balance sheet is very clean. We did not expect to be as efficient in recoveries. The efficiency of our recovery activity is demonstrating that the provisioning level of the bank was more than adequate. Because we are very good at recovery, we are having so many write-backs, not because we provisioned more than we should have,” he said.
The final element in restoring the institution was a complete image overhaul. It entailed streamlining the worn name of Banque Libanaise pour le Commerce into the new BLC Bank with a distinct logo as well as moving to a new head office and the construction of a new branch in Chtaura. The image recovery also benefits from the presentation savvy-ness that Karam exhibits in his dealings with the public and media. He is among the most colorful representatives of the banking profession that one can meet in Lebanon, with a communication repertoire that includes skilled use of the underdog motive as well as lessons on selling a story rather than a product and making this story attractive, which he confessed to have learned from a stint of working in haute couture many years ago.
An issue worth adamancy to Karam was emphasizing that the telling of the BLC story as a turnaround came after – not before and definitely not instead of – the breakthrough accomplishments in rescuing the bank. As the BLC rescue team also worked without allegiances to any special interests, this is where BLC could serve as a lecture on the Lebanese economy’s recovery potential, he suggested, if government decision makers were approaching the mission of fiscal rescue by “doing small steps, like we did with BLC. I think the BLC model is perfectly applicable and will be able to change the image of the country and raise [sovereign] ratings. Take small steps, and then have something to talk about.”
This turnaround expert has a point. Instead of promises and declarations that have been over-used and replayed to the point of inducing instant coma, decision makers on the larger political framework for economic recovery could quite possibly find a useful cue in the elemental recipe to achieve first and talk after the fact.
Onwards and upwards
But be that as it may, and as chances for political action on the fiscal front might best not be discussed until opportunity sparks higher, the matter at hand for BLC right now is to move forward. After completing three years of stewardship, the central bank could now sell BLC with a handsome reward for its efforts of putting up nearly $150 million in capital for the institution. According to Karam, the World Bank’s International Finance Corporation this summer undertook an evaluation of BLC and its subsidiaries – of which BLC France with branch offices in the Gulf is the main item – and recently delivered “extremely positive” findings to the central bank regarding both the bank’s valuation and its quality.
If and when the central bank would sell BLC Bank and by which mechanism, is not in his knowledge, Karam said, but it would be likely to depend on the format of offers and interested investors. “The sale of the bank is in the books, because the central bank doesn’t have the vocation to own a commercial bank. We have been hurt by insufficient levels of quality in the past and we are looking for a quality investor with the means to put the price.”
An auction or direct sale would both be possibilities, and theoretically, the central bank could even maximize its revenues from the sale by gradually releasing BLC shares, which are listed on the BSE. In Karam’s view, a merger with another Lebanese bank might be an option but he would favor a merger with a bank of equal, not larger size. But BLC might be very attractive to a financial company seeking to diversify into a commercial bank he opined, because the bank has now installed a complete structure and well-oiled middle management. As the bank’s machine moreover is geared well towards consolidation, “BLC could be a platform to acquire other small banks,” he said.
It is clear that the recent growth of the bank arose not as part of the current management’s mission but rather as a kind of side effect to the high velocity achieved in the bank’s recovery efforts. To take best advantage of its good story and current momentum of growth, BLC bank very soon needs either to find a suitor or receive a handsome capital injection. “We are at a point where staying with the central bank is bad for us,” Karam admitted, “so we either sell or the central bank changes its perspective totally and approves our expansion business plan, which would mean moving forward on different fronts, the Lebanese front and cross-border.” BLC Bank is a ready-for-sale package. But how to trust a sales package? On the ride down from the Olympus of the BLC executive offices, several head-office employees enter the elevator. One young lady tells her colleague, “I am acting as a banker, a BLC banker.” The moment is too good to miss for this reporter. “What is a BLC banker?” “Always happy,” she replied.