Lebanese Canadian Bank’s (LCB) rise over the last ten years has been quite impressive. The bank was able to accomplish close to a miracle by moving from the 21st place in terms of assets and deposits in 1998 to join the elite of the ten largest Lebanese banks by 2006 and 8th in total assets and deposits by the end of the first quarter of that year. When you consider that this significant rise was accomplished over a relatively short period (six to seven years) and in the midst of a heavy dogfight for deposits among more than 50 Lebanese banks, then one can only conclude that LCB’s meteoric rise has been achieved through hard work and shrewdness on the part of the bank’s management.
An aggressive expansion strategy, which was based on an active expansion of the domestic branch network (almost 30 branches by the end of 2005) and the hiring of experienced management and personnel from other banking institutions at home and abroad, also helped the rise of LCB into the Alpha (top 10) Group of Lebanese banks. The growth of LCB is furthermore a reflection of the economic drive of the country since 1993, when the reconstruction program started to take off in the aftermath of the 1975-1990 civil war.
LCB was set up in 1988, when the current chairman, Georges Zard Abou Jaoude, with a group of Lebanese-Canadian investors, took over the Lebanese franchise of the departing Royal Bank of Canada. For years after the take over, LCB benefited from the infrastructure left behind by RBC as well as from the relations with the Canadian bank, which for a certain amount of time acted as LCB’s main correspondent and clearing agent in the international money centers. However, the bank never rested on its laurels and proceeded to modernize and increase its capital gradually throughout the years, in a massive effort to keep up with the local competition. In doing so, the bank’s capitalization moved from a relatively insignificant LBP5 million in 1988 to more than $180 million today.
In 2002 and 2003, the bank realized that it had grown too quickly in terms of assets and deposits in relation to its capital base. It therefore proceeded to tap the local capital markets by becoming one of the first banks in Lebanon to issue preferred shares in both 2002 and 2003 for amounts of $15 million each. Preferred shares are generally regarded as tier 1 capital but don’t give their holders a share of the capital or voting rights. These preferred share issues positioned the bank firmly among the big local players and transmitted a clear message to the market regarding its capacity to manage rapid growth and develop an efficient financing strategy.
Looking at LCB’s financial figures and growth in the last few years, management has been able to build a strong track record, creating a much improved financial structure and a growing market share. The quality of management has been reflected not only by significant growth in deposits, but also by diversification of funding, conservative allocation of funds in light of a constraining operating environment, containment of non-performing loans, strengthening of both regulatory and economic capital, and rising profitability. Today, LCB can safely claim to have transformed a small local banking franchise into one of the largest and most profitable banks.
The current strategy is to diversify banking products and revenues, while improving the quality of service to existing and new customers. The branch network is to continue growing so as to cover strategic geographical areas, while risk management is to be enhanced in preparation for the implementation of Basel II capital regulations, which are due to start being imposed in Lebanon in 2008. Retail banking is particularly pinpointed as an area of growth by management, which sees in retail lending a way of reducing exposure to a rising number of non-performing corporate loans. Retail is also believed to have a significant potential in Lebanon as well as in other regional countries, where the bank plans to establish branches or subsidiaries.
On geographical expansion, there are plans to establish a presence in countries of the Levant and the Gulf, as well as in any other country where the Lebanese diaspora is important. For instance, the bank has already established a representative office in Canada (Montreal), where more than 300,000 Lebanese immigrants live. The bank’s management considers geographical expansion to be key for revenue and asset diversification, which have become essential ingredients for success. The Lebanese market has become limited in nature and is over-crowded in the sense that there are too many banks fighting for the same customers. Outside Lebanon, LCB’s management is taking a close look at countries such as Syria, Algeria and Sudan (where it already has a presence through a small stake in a local bank), as these markets are regarded as representing a significant potential.
A merger with or an acquisition of a local peer would not be carried out haphazardly, as LCB’s management would only consider candidates who bring some level of added value. A local merger or acquisition would only be carried out if synergies are strong, and if the candidate has some kind of interesting overseas franchise. The interest in the latter reflects the bank’s strong desire to diversify its franchise away from a constrained local market.
The first phase of the bank’s long-term strategy, which consisted of enlarging the size of the balance sheet, increasing deposits and boosting revenues, has so far been accomplished with success. The second phase of the strategy is now more geared towards an optimization of the balance sheet size, a diversification of assets and revenues, and the exploration of untapped markets, which represent significant potential.
Shareholders and support
At present, LCB is principally owned by holding companies, namely Perpetual Holding (35%), the Hamdoun family (24%), George Zard Abou Jaoude (15.5%), NJO Holding (10%), Amwal al-Khaleej (4.95%) and the Nasrallah family (4.5%). Individual shareholders make up the remainder.
The shareholders have shown a significant interest in their banking investments by supporting management’s plans for growth and injecting capital when necessary. The shareholders have been instrumental in the rise of the bank into the top ten bracket of Lebanese banks and are currently active in improving corporate governance, which is still an issue amongst Lebanese banks. By supporting the bank financially and making clear efforts to spread decision making among many individuals within management, the shareholders have instilled a certain degree of trust among customers. In addition, the implicit support of the central bank (BDL) for the Lebanese banking sector as a whole is a further indication of stability and implicit support.
Profitability and performance
The bank’s profitability has been impressive for the last five years. Net profits have risen from $7.4 million in 2002 to reach $26 million by the end of 2005. At the end of 2005, the bank’s return on assets (which is calculated as net profits divided by average total assets) was one of the highest among the ten largest Lebanese banks at 1% (1.1% in 2004). The bank has been quite efficient in its treasury and capital markets activities during the last three years, but made the bulk of its profitability from traditional lending activities and from high yielding government securities.
The bank is clearly aiming at building a more diversified and constant income stream, as it realizes that the Lebanese market offers limited opportunities. However, LCB has improved the cost efficiency of its funding base, and has started to place its funding more efficiently. Increasing non-interest income remains a priority and the bank has been active in developing its treasury and fee income generating capabilities. The rise in profitability of the last few years was instrumental in allowing the bank to improve its capital adequacy and to strengthen its loan loss reserve as a way to cover existing and potential bad loans.
With a cost to income ratio below the 50% mark, the bank has also established itself as one of the most efficient banks in its peer group. Operating costs are being controlled, while expansion plans have yielded more revenues than they have generated costs.
The bank is below the industry average in terms of non-performing loans to gross loans (loans given before reserves but net of unearned interest) with a ratio of around 12% in 2005 compared to an industry average of more than 20% (2004 figures). This was due to a massive restructuring effort on the loan portfolio and an improvement in the bank’s risk assessment capabilities. The bank’s loan loss reserves, which were increased in the last few years thanks to a better profitability, covered almost 70% of non-performing loans. This figure reflects the bank’s loan optimization effort of the last few years, as well as a prudent and conservative approach towards lending.
Recoveries of delinquent loans were improved since 2003, as the bank stepped up its efforts and improved the classification system for loans. This new and more efficient loan classification methodology has allowed the bank’s credit officers to better assess credit risk and avoid potentially bad loans.
Liquidity and funding
By enlarging its branch network and stepping up its marketing efforts abroad, the bank was able to expand its customer deposit base substantially. The bank’s customer deposits have risen from a level of around $959 million in 2002 to over $2.3 billion by end of 2005, and are regarded to be stable and recurrent in nature. Customer deposits are the bank’s main funding source, while other forms of funding include principally inter-bank deposits, which remain minimal as compared to customer deposits (average inter-bank deposits account for less than 10% of the bank’s total funding).
The bank’s total liquid assets, which exclude government debt securities, were made up of cash reserves at the BDL, and covered more than 45% of customer deposits in 2005, while these were a little bit more than 40% covered by government debt securities. The latter accounted for more than 40% of total assets in 2005, but have become increasingly liquid in a developing secondary market (boosted by the sudden interest of Gulf investors in the Lebanese capital markets).
The bank still has maturity mismatches, as it funds its medium-term assets with short-term deposits, but has almost no currency mismatches. The maturity mismatch is found throughout the entire Lebanese banking sector, although the recurrent and stable nature of customer deposits mitigates this deficiency significantly. LCB’s customer deposits are highly diversified and there are virtually no concentration of deposits amongst a small number of depositors.
The bank’s capital adequacy has improved for the last few years, as reflected by a rising capital adequacy ratio from 15% in 2001 to over 22% in 2005. The consecutive issues of preferred shares in 2002 and 2003, and the planned capital increase and preferred share issue in 2006 should allow the bank’s capital to catch up with asset growth. Rising profitability has also added the flexibility of organic capital growth.
LCB has grown significantly in the past few years, as the bank’s management and shareholders expanded the branch network, the product base, and customer deposits. Profitability was also enhanced, allowing capital to increase organically. Today, the bank is in a position where it is trying to optimize its size and exposure to Lebanon, while seeking to expand geographically in order to diversify revenues and reduce the risk level of assets. By expanding activities in markets with significant potential, the bank will inevitably reach a new level of sophistication, which will see assets and revenues diversify, and capital grow significantly over time.