The term to best describe the approach of Lebanese Canadian Bank to its current development strategy is multitasking – but what the bank does in pursuit of its second five-year growth program actually goes a bit beyond the range of activities associated with that word. Lebanese Canadian is in fact making an attempt at multi-directional multitasking.
The core objectives of the program apply the tried-and-true pattern of Lebanon’s banking leaders seeking to achieve vertical and horizontal growth through diversification of business lines and through geographic expansion into regional markets. Lebanese Canadian, however, stands out among its peers by pursuing this path with more than common vigor. For example, the bank is looking seriously at joint ventures and new operations in at least half a dozen countries. At the same time, it is seeking to stack its activities in a vertical structure reaching from Islamic banking and asset management on the one hand to retail lending and insurance brokerage on the other.
First growth plan
To back up these lofty ambitions, Lebanese Canadian has the accomplishments of its first growth plan to show for itself. The bank devised this plan during an establishment phase following upon the majority entry of Lebanese shareholders and transformation from being the Lebanese branch of the Royal Bank of Canada into Lebanese Canadian Bank in 1988.
Implemented with the start of the new millennium, the first five-year plan took Lebanese Canadian from being a midsized bank with assets below $500 million at the beginning of 2001 to a five times larger asset base by the end of 2005, making it a solid member of Lebanon’s alpha group of banks (by the definition that banks in this group have deposits of more than $2 billion each) in late 2004.
At the end of 2005, the bank’s deposits stood at around $2.3 billion and assets reached $2.8 billion. In terms of market share, Lebanese Canadian clocked in at around 4% at end of last year, up from 1.5% at the commencement of its five-year growth program in 2001.
In embarking on its second five-year strategy, the bank met and exceeded its profit target of LL 10 billion ($6.65 million) for the first quarter of 2006 by reaching over LL 11 billion in [unaudited net] profits in the three-month period. The asset and deposit figures did not change greatly in the first quarter, according to the bank’s chief financial officer, Charles Skaff.
Over the past five years, Lebanese Canadian also advanced from a position of relative obscurity to that of an operator with a high visibility profile. It refurbished and expanded its domestic network, establishing 21 new branches (advancing from 10 branches at start of 2001 to 31 this month). Moreover, Lebanese Canadian maximized the publicity benefits of gaining ISO 9001-2000 certification or excelling among its peers by highlighting its performance peaks such as being the top bank in the alpha group last year in terms of its growth in deposits (18.21%) and total assets (21.16%), as well as achieving the alpha group’s highest percentage return on average equity with 25.23% RoAE.
For its cross border outreach, the bank opened a representative office in Montreal, Canada’s epicenter for the Lebanese community, and started offering products tailored to Lebanese expatriates in the Gulf region while it staked out its domestic claim to prominence with acquisition of a downtown Beirut plot of land for its headquarters project smack on the Martyrs’ Square axis. In other visibility enhancing steps, Lebanese Canadian undertook sponsorship of events in both the professional realm – i.e. conferences and trade fairs – and the corporate citizenship area, through social, cultural, and environmental ventures.
Based on the groundwork of the years 2001 – 2005, the year 2006 appears to easily be one of the most important for the bank’s development plans. In the first quarter, a main target was increasing its capital, along with making preparations for an initial public offering (IPO). The bank is further seeking to make a domestic acquisition before the end of the year, and is angling for joint venture activities with an international banking institution.
The 2006 capital increase program, which was still in progress at time of writing, had been planned for a while. Lebanese Canadian spelled it out as a three-layered project that includes issuance of new common shares, a preferred shares issue, and launch of Global Depository Receipts (GDRs). However, while the combined growth horizon for these three measures had been an increase in the bank’s capital to about $250 million at end of 2006, the target figure has recently been revised upwards and now stands at over $300 million.
Two steps out of three
In the first two steps of this three-tiered capital increase program, Lebanese Canadian this year issued new common shares and preferred shares to the tune of $35 to $37 million per measure, which together would boost the bank’s capital base by about 50%, from $140 on December 31, 2005, million to $210 million by end of May.
The $35 million increase of common capital proceeded as planned, with participation from existing and new shareholders, and led to a 4.95% equity participation of Gulf-based investors, Skaff told Executive.
The primary objective of this increase was to enhance the bank’s ability to ready itself for the Basel II banking standards, which will govern the industry as of 2008. For alert banks, Basel II risk management rules are already the yardstick by which they are shaping policies.
The preferred shares issue, however, encountered over-demand from the bank’s existing shareholders, attracting almost 25% more applications than could be filled under the planned issue size of $30 million – although this was double what the bank had offered in each of its two earlier preferred shares issues in 2002 and 2003. Thus, Lebanese Canadian decided to increase the issue to $37 million, for which it was expecting approval from Lebanon’s central bank at the end of May.
While these capital raising initiatives were fully accomplished, some of the bank’s other new development projects have been evolving slower than Lebanese Canadian’s chairman and top management hoped for. The first measure to progress less speedy than programmed was the IPO plan. Mostly, this was due to unfavorable influences on the timing. As the regional stock and equity markets caught the severe correction jitters in February and March, Lebanese Canadian thus missed out on its IPO dream timeframe of realizing the flotation in the first quarter of the year.
A bitter second place
Also on the acquisition front, Lebanese Canadian had to wrestle with the fact that buying a decently performing Lebanese bank is easier said than done. In December of last year, Lebanese Canadian made an attempt at what would have been a dream acquisition, according to its chairman, George Zard Abou Jaoude. The takeover of Lebanon’s BLC bank, for which Lebanese Canadian claims to have been the second highest bidder, would have satisfied the bank on two of its top strategy objectives – a massive domestic market share boost factor and a readymade expansion platform in the Gulf region.
Lebanese Canadian’s bid for BLC encountered overly strong competition from the cash-heavy Higher Investment Council of Qatar but it also got derailed by the bank’s downward revision of a higher bid threshold which it had been preparing earlier, in partnership with a potent corporate partner from the Gulf region. Here, according to Abou Jaoude, the bank’s double aim of applying the most aggressive and the most conservative principles in unison, did Lebanese Canadian a disfavor and made it emerge a bitter second place in the contest for BLC.
This means that Lebanese Canadian has still to go through the rituals of courtship and assimilation of a target bank in the Lebanese market, a process which Skaff said it hopes to complete by the end of the third quarter of 2006. This acquisition is highly important if the bank wants to carry forward its strategy that calls for reaching a domestic market share of around 10% by 2010. While organic growth might suffice to add another percent in market share by the end of 2006, when Lebanese Canadian intends to account for 5% of domestic market share, and yet another point or two in the following years, a takeover is a necessity for reaching the 2010 market share target which would make the bank “a major player,” by its own reckoning.
Geographical expansion
Also fully loaded is the bank’s geographic expansion agenda. According to Abou Jaoude, Lebanese Canadian is not only pursuing the takeover of a controlling majority in an Algerian bank in addition to having bought a small stake in Sudan’s Al-Salam Bank, but it also is looking at establishing a brokerage unit in a GCC country, at buying a bank in Egypt, at creating a new bank in Iraq, at branching out into Syria, at Bahrain and at Qatar. All this in conjunction with developing its private banking business, an Islamic window, and an investment banking line and while continuing to expand its retail operations.
At the end of this growth cycle, Lebanese Canadian expects to stand as a banking institution high up in Lebanon’s alpha group, and achieve a diversified income with operations abroad contributing at least 40% to its profits.
With its past five years of rapid growth and its self-perception of being a young and flexible, aggressive institution with clear-cut principles that seek more than a role in profit making, Lebanese Canadian has nurtured seedlings for the whole plantation of its expansion objectives. Its targets, which are driven with great personal investment and enthusiasm by Abou Jaoude, destine the bank to a pursuit of power growth for at least its second five-year plan.
In developing its long-term vision, however, it is pivotal for Lebanese Canadian to accomplish its IPO, implement its joint ventures with international partners, and buy a local bank. The bank is subject to the same country risks and political factors which constitute the vagaries of doing business in Lebanon and the Middle East region. The bank’s executive leadership presents an optimistic view on their ability to succeed without improvements in the political and fiscal climate but admits that a successful “Beirut I” conference for Lebanon would serve as welcome enhancer of its potentials.
