Did the Audi-Saradar merger hint at a possible consolidation trend in the Lebanese banking sector, or was it a one off? The sector has seen a number of waves of mergers and acquisitions in recent years, especially in the beginning of the post-war era, as some larger banks capitalized on the difficult situation in the early and mid-1990s to eat up smaller ones. Many large banks looked to expand their branch networks, and realized the most efficient way to achieve this was through the acquisition of smaller ones.
Since then however, branch network expansion is no longer the primary goal of leading banks in the country, and can therefore no longer trigger significant mergers and acquisitions. Nevertheless, other drivers that can inspire consolidation in the global banking industry are present in the market and are likely to ignite a similar wave locally.
The gap between the top Lebanese banks and the smaller ones is constantly widening, with a marked concentration of deposits and loans among the top 20 banks. Top banks are constantly seeking to fend off competition from large regional banks by achieving a larger scale and striving for higher quality services. By targeting certain specialized institutions through ‘horizontal’ consolidation, these banks can achieve critical mass in terms of the financial resources, skill, and geographical diversification needed for competing on a regional scale (amply demonstrated by Audi’s acquisition of Saradar, which gave it a private banking unit and access to the Gulf market). Furthermore, Lebanese banks face sizeable overhead costs, and as such, they would substantially benefit from spreading such costs over a wider asset base. Another driver for consolidation is the access to distribution channels and new markets. Regional and international banks, such as NBK, Gulf Bank, HSBC and Standard Chartered, have established a presence in almost every major city in the Middle East. As the region is becoming more economically cohesive, businesses require “fully regional banks.” Lebanese banks should attempt to establish a widespread presence if they are to retain a role. Currently, a number of medium and large Lebanese banks do have branches in certain neighboring markets. Consolidating such banks under one institutional roof with a regional presence would certainly provide competitive advantages to the overall sector. The highly competitive domestic banking environment in Lebanon, coupled with the threat brought on by regional banks, is already forcing Lebanese institutions to look to nearby markets to expand into. As such, many banks are making distinct efforts to plow into the GCC market (Audi-Saradar, BEMO Bank), the African market (Byblos), and the Levant (SGBL, BEMO-Saudi Fransi, BLOM, Fransabank).
EXECUTIVE has identified 10 banks (from the “gamma ” and “delta ” groups of banks) that it believes offer attractive merger and acquisition opportunities. The order in which the following banks are listed is by no means an indicator of preference, and their inclusion in no way indicates a willingness of the existing shareholders of those banks to entertain the possibility of consolidation.
Al Mawarid Bank SAL
Al Mawarid Bank, ranked number 21 in the banking sector, was established in 1980. Following some limited growth during and immediately following the war, the bank’s management, led by general manager Marwan Kheireddine, undertook a major revamp of the bank’s operations. The bank is currently perceived as one of the few with high standards of efficiency, customer service and reliability, and its network of 12 branches focuses on Beirut’s southeastern suburbs, an area weakly catered for by other banks. Furthermore, the bank’s personalized approach to banking has earned it a favorable word-of-mouth reputation with the middleclass and has a strong Druze customer-base, especially in the Chouf. From a financial standpoint, the bank enjoys a healthy balance sheet. Liquidity levels are high, with cash balances around 35% of total assets, and only 11% invested in Lebanese government treasury bills. Customer loans account for just under 50% of total assets and benefit from a doubtful loans ratio of only 4.5%. The bank has also managed to diversify its income, with interest income accounting for around 56% of the total, and income generated from transactional services (commissions) at around 42%.
Al Mawarid Bank thus comes forward as a bank with modern management systems led by a well-educated management team, a good reputation, attractive geographical presence, healthy financials, high liquidity levels and strong growth.
Jammal Trust Bank
Jammal Trust Bank, ranked number 33 in the banking sector, was established in 1963. The bank was originally established as Investment Bank SAL, and was renamed Jammal Trust Bank in 1971 following its acquisition by Ali Jammal.
The bank is reasonably well established in Lebanon and has four branches in Egypt, a representative office in London, and owns local subsidiaries in real estate investments, trusts, and insurance. It has 20 branches domestically, including in Tripoli, Bint Jbeil and Baalbeck. From a financial standpoint, the bank has a diversified balance sheet, with cash balances of around 25% of total assets. The bank does, however, have a little more exposure to government debt, with Lebanese T-Bills accounting for 35% of total assets. Loans account for around 30% of total assets, with doubtful loans at 7.5% of total facilities. Interest income accounts for around 80% of total income, while commissions account for only 16%. Jammal Trust Bank, therefore, offers an opportunity for institutions looking for new product lines and markets to expand into.
Banque Misr Liban SAL
Banque Misr Liban is one of the oldest banks in Lebanon, registering third on the central bank’s list of banks. The bank, which currently ranks 24th in the sector, was established in 1929, and is majority held by Bank Misr Cairo. While the bank currently has no foreign presence in Egypt, it remains associated with Bank Misr-Cairo, which maintains control of the bank’s management. The bank currently operates a network of 16 branches, evenly spread out throughout the country. The bank’s growth has been stalled in recent years, with little banking activity. Nevertheless, the bank benefits from a high level of liquidity, as cash positions represent in excess of 37% of total assets, while investments in Lebanese government T-Bills account for 48%, with a small loan portfolio. The bank’s sources of funds consist almost exclusively of customer deposits and shareholder equity, with almost no other liabilities whatsoever.
As such, the bank presents to interested parties a clean and liquid balance sheet, which can be leveraged upon to re-launch the institution and use the available funds to transform it into a full-fledged national bank.
Near East Commercial Bank SAL
Near East Commercial Bank seems to be another “dormant” bank in Lebanon. Established in 1979 and currently ranked 41st in the sector, the bank has not witnessed any significant growth in the past few years, despite having many of the characteristics that would allow it to prosper.
The bank also benefits from high levels of liquidity, with cash balances at almost a third of total assets, and investments in short-term Lebanese government T-Bills at 37%. While loans constitute around 29% of total assets, they comprise to a great extent short-term overdraft facilities, while doubtful loans do not exceed 5% of total loans. On the other hand, the bank’s source of funds consists primarily of customer deposits, which are to almost 75% locked in long-term saving accounts, thus providing the bank with a healthy match of assets and liabilities.
As such, the bank is highly liquid, with well-managed assets and liabilities, and consequently an adequate platform to grow both locally and regionally. Interested institutions may also benefit from cooperating with the bank’s existing majority shareholder, Al Wafa Holding, in jointly developing the bank. Societe Nouvelle de la Banque de Syrie et du Liban SAL
After undergoing a wave of restructuring over the past years, which has also included a change of the bank’s corporate identity, and a marketing effort to reposition the bank on the market, the bank’s balance sheet looks improved, with ample liquidity. Cash balances account for almost 30% of the bank’s total assets, in addition to around 53% in short-term liquid government T-Bills. The bank’s loan portfolio accounts for only around 15% of total assets, with doubtful loans at around 13% of the total. Sources of funds consist mostly of long-term customer deposits in saving accounts, in addition to the bank’s equity. While the bank is not witnessing any marked growth, its liquid balance sheet, long-term sources of funds and domestic branch network of 18 branches – provides an adequate platform for expansion. As such, the bank would seem attractive to institutions seeking an already established network, coupled with enough liquidity to aggressively tackle the market.
Creditbank is the result of the merger of Credit Bancaire and Credit Lyonnais-Liban, in 2002. The new bank, ranked at number 26 by total assets, inherited the assets of both banks, along with a team of professionals from Credit Lyonnais-Liban and Credit Lyonnais-France’s operation in Beirut. The bank has been achieving significant growth since its establishment in 2002, not really suffering from any post-merger gap.
Creditbank benefits from a highly liquid balance sheet, with more than 30% of assets held in cash, and another 33% in short-term liquid T-Bills. While the bank’s loan portfolio also constitutes around a third of total assets, doubtful loans do not exceed 6% of total loans, and are adequately provisioned for. The bank’s sources of funds are mainly long-term customer deposits held in savings accounts.
As such, the bank presents potential investors with a clean and liquid balance sheet, a decent branch network, a professional management team, attractive growth, and a clean reputation in the banking sector in Lebanon.
Lebanese Swiss Bank
Lebanese Swiss Bank is a 100% Lebanese bank. Ranked number 28 by total assets, the bank has been undergoing steady growth in the past few years, building upon an evenly distributed branch network of six branches nationwide.
The bank’s balance sheet is highly liquid, with cash balances at almost 40% of total assets and Lebanese T-Bills just over 31%. The bank’s loan portfolio constitutes less than 30% of total assets, of which half is in short-term overdraft accounts. Doubtful loans do not exceed 7%, and are well provisioned for.
Lebanese Swiss Bank presents interested investors with a liquid and clean balance sheet, with a good platform for branch network expansion, and room for growth in the private banking field, in which the bank enjoys a good name.
Middle East & Africa Bank
Middle East and Africa Bank, also a 100% Lebanese bank, is owned by the Hejeij family, which founded the bank following the end of the war in 1991. The bank developed into a decent financial institution, which has continued to undergo growth in recent years. The bank, ranked number 32 by total assets, focuses on Beirut and the southern suburbs, providing corporate and private banking services to its clientele.
The bank enjoys a high level of liquidity, with cash balances at more than 40% of total assets, and short-term Lebanese T-Bills at around 30%. With a loan portfolio of around 20% of total assets, doubtful loans are at less than 6% of total loans, and are almost fully provisioned for consistently. The bank also has a diversified income base, including interest income at 57% of total income, commissions at 25%, and other service-related income at 18%.
The bank provides interested buyers with a good name, a liquid balance sheet and a clean loan portfolio, in addition to a wide range of services that constitutes a platform for development into any specialized type of financial institution.
Federal Bank of Lebanon
Federal Bank of Lebanon is one of the smallest and oldest banks in the country, ranked at number 40 by total assets. Established in 1952, it remains owned and run by the Saab family, covering Beirut and some suburbs with eight branches.
The bank’s balance sheet enjoys a decent level of liquidity, with cash balances at 25% of total assets, and T-Bills at 27%. Loans represent 39% of total assets, but suffer from a doubtful loans ratio of over 26%.
The advantages to a potential buyer would be the family aspect of the bank, which would facilitate potential acquisitions, a decent branch network that can be potentially expanded, and a good level of liquidity on its balance sheet. However, potential buyers should be cautious when reviewing the bank’s loan portfolio.
Banque Lati has been operational in Lebanon for more than 80 years, and is still held by the Lati family, the bank’s original founders. Nevertheless, the bank was not able to achieve scale, and remains a two-branch bank.
On the other hand, the bank’s balance sheet presents attractive opportunities to potential buyers. Cash and T-Bills represent around 35% of total assets, providing decent levels of liquidity. In addition, the bank’s balance sheet holds a large portfolio of real-estate assets, and one can certainly capitalize on them given the high growth in the real-estate market in Lebanon. In addition, the bank’s doubtful loans remain at less than 8% of the total portfolio, and are fully provisioned for. The bank also has a diversified income base. As such, Banque Lati provides potential investors with a name that has been present in the market for more than 80 years, an attractive balance sheet structure with liquidity and real-estate properties, and a diversified income base.
Nevertheless, it takes much more than a display of attractive features in the sector to entice either local or foreign institutions from undertaking the numerous efforts to invest in or buy out local banks. Large Lebanese banks, which have already completed a number of acquisitions in the past 10 years, are likely to be too busy digesting, or rather integrating, their acquisitions. If a new wave of consolidation is to take place in the market, it is likely to involve banks other than the top five in the country – perhaps the bottom 10 of the alpha and top five of the beta groups. It remains to be seen whether such banks are likely to entertain the possibility of seeking organic growth through acquisitions. Chances are that all bankers are eyeing the market and recent developments – such as the Audi-Saradar merger – are increasing the level of concentration of the industry to previously unseen levels. According to central bank figures, 80% of the sector’s assets are distributed among the top 16 banks. Such a trend would threaten medium-sized banks, which will ultimately seek ways to gain mass to ensure their presence among the giants.
1 Gamma Group: Deposits between $100 million and $300 million
2 Delta Group: Deposits less than $100 million
3 Alpha Group: Deposits over US$1 billion
4 Beta Group: Deposits between US$300 million and US$ 1 billion
THE BOTTOM END
While Lebanon’s lowest ten banks may look like bargains to potential buyers, they offer little to no investment opportunities, only unwanted baggage
To the untrained eye, the best bargains for those seeking to acquire banks in Lebanon may lie in perhaps the 10 smallest banks in the sector. Such may be the case in other markets, where even the 10 smallest banks may be operational, and may present potential buyers with some value-added in return for the price paid to acquire them. In fact, Lebanon’s bottom 10 banks offer little or no opportunities.
Only three – Banque Pharaon et Chiha, Finance Bank, and Banque Lati – are Lebanese. Only the latter could provide potential buyers with an opportunity, given a clean and liquid balance sheet. As such, a potential buyer would benefit from a banking license without any associated burdens. On the other hand, banks like Finance Bank and Pharaon et Chiha carry unwanted baggage, which would have to be borne by any incoming investor. Banque Pharaon et Chiha’s loan portfolio accounts for more than 30% of total assets. Doubtful loans, however, stand at around 10% of the bank’s total portfolio, while bad loans account for another 10%. In addition, of the bank’s total loan portfolio, more than 88% are in the relatively less liquid commercial loans. Such a ratio does not compare favorably to the Delta group of bank’s loan portfolio composition, where around 50% of total loans are in short-term overdraft accounts, and only 21% in longer-term commercial loans.
The same can be said for Finance Bank, the loan portfolio of which accounts for almost 30% of total assets. In parallel, doubtful loans stand at almost 13% of total loans, while provisions for doubtful loans cover roughly only half that amount. In addition, the bank’s income base is not at all diversified, with more than 95% of the bank’s income coming from interest revenues.
Of the seven foreign banks in the bottom 10, many, like Standard Chartered, Banca di Roma, the Saudi National Commercial Bank, and Bank Saderat Iran are making attempts to make inroads into the domestic market, and as such are not likely to present acquisition opportunities. Others, like Pakistan-based Habib Bank and Iraq-based Rafidain Bank, while not aggressively attempting to increase their market share, have been present in the country as semi-dormant banks since the early 1960s, weathering the war days, and are not likely to bail out now. Arab African International Bank, owned in almost equal shares by the ministry of finance in Kuwait and the central bank of Egypt, is also somewhat of a dormant bank, with neither institution likely to give up their presence in the Lebanese banking market.
Finally, for those who aspire to owning a bank, central bank governor Riad Salameh seldom misses the opportunity to emphasize his support for consolidation in the banking sector, to the extent that the central bank is prepared to extend subsidized credit facilities for banks wanting to acquire others. In yet another effort to improve the consistency and efficiency in the sector, the central bank has been reluctant to issue new banking licenses, having not done so for over 10 years. As such, new entrants to the banking sector in Lebanon must acquire one of the existing licenses, whether local or foreign. Nevertheless, the sale and purchase of such licenses is closely monitored by the central bank. One of the conditions to be met by potential purchasers of banking licenses in Lebanon is a close personal and professional profile of all of the individuals making the purchasing party. Through such a screening process, the central bank ensures that those acquiring a banking license in Lebanon are of a certain caliber, have the proper banking background, and professional expertise to positively contribute to the sector as a whole. Through such control, the central bank was able to conserve the image of the banking sector, at a time when a large number of high net worth individuals are returning to the country with enough funds to cover the price of a banking license.
Tony Hchaime is an investment banker at the Middle East Capital group (MECG)