Go West or East young bank

Lebanese banks need to look beyond their borders in order to improve revenues and rely less on a stagnant local economy

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Banque Audi’s recent move into Jordan is much more than just a reflection of Lebanese pioneering tradition. Lebanon’s dire economic situation has affected the quality of loan portfolios and domestic placement opportunities and has forced many of Lebanon’s leading banks to look beyond their borders to diversify assets, improve the quality of profits and revenues, and rely less on a stagnant local economy.

Indeed, in the last ten years, banks such as Société Générale de Banque au Liban (SGBL), Byblos Bank, Banque Audi, BLOM, and Lebanese Canadian Bank have either purchased banks in neighboring countries, set up joint ventures with local banking groups in these countries, or established branches abroad. SGBL was the first to show interest in Jordan and purchased a small Jordanian bank in the late 1990s (Middle East Investment Bank), while Banque Audi recently followed suit by obtaining a license to open branches there. Audi has already opened three branches in Jordan, and has an objective of opening up to ten branches, while BLOM has also obtained a branch license in Jordan. Meanwhile, Byblos Bank has set up a banking subsidiary in Sudan, and Lebanese Canadian (LCB) has purchased a minority stake in a local Sudanese bank. LCB even set up a full branch in Canada to cater for the 300,000 strong Lebanese community there and ultimately aims at obtaining a full banking license from the Canadian Authorities. Finally, Fransabank has expressed a keen interest in opening a branch in Algeria.

While branches are being opened willy-nilly throughout the region, many Lebanese banks have been keeping an eye on the development of the Iraqi banking sector, where potential is significant. It is only a matter of time before Lebanese banks start sniffing around Baghdad and other main Iraqi cities for opportunities. The Iraqi banking market has around eighteen private banks, and almost as many government owned banks, with the private banks having all been set up during the embargo years by local merchant families. These are now all keen to develop their banking franchise and have expressed clear intentions to hook up with fellow Arab banks, mainly as a means to acquire expertise and banking know-how. Lebanese banks have been particularly favored by Iraqi bankers, who are said to be impressed with their technical capabilities and banking traditions. A number of Iraqi banks have made it clear to Lebanese bankers that they would be ready to give up 49% of their capital (which is the regulatory maximum for foreign stakes in Iraqi banks) to Lebanese banks, as well as the management. Although the security problem in that part of the world still hampers any efforts to establish banking operations, and the greed of some Iraqi bankers as regards to their selling prices is a major obstacle, Lebanese banks will certainly start making acquisitions there in due course.

Other countries such as Egypt and Algeria also appear to be interesting for Lebanese bankers, who would definitely have a clear qualitative advantage over their local peers, particularly with regards to Algeria. The latter is very similar to Syria, in that local banks have little or no sophistication in a country that sticks out as one of the richest in the Arab world in terms of natural resources. Moreover, the corporate, project finance and retail banking sectors are just crying out for more sophisticated financial institutions located on-site. However, Algeria’s banking environment is still severely hampered by insufficient and antiquated regulations, and transparency and disclosure standards remain light years behind those of Lebanon. The old socialist or even Soviet-style banking sector is still in place despite almost complete decrepitude, and the Algerian authorities have a significant amount of work to carry out before transforming Algeria into a gold rush destination for Lebanese bankers. Setting up a branch there as a first step would not be a bad idea though, as it would give the bank in question time to gauge the market, establish a list of what is needed in terms of regulation, and even get opportunistic in terms of project financing and retail banking.

Egypt is a different proposition, in that it is the most populated Arab country and has a very solid industrial and corporate base, which is also characterized by a strong track record. Gaining market share, even small, in the Egyptian corporate sector would be a major revenue boost for Lebanese banks, and would allow them to diversify away from the limited and small Lebanese corporate sector. However, Lebanese banks have to bear in mind that, despite Pharaonic efforts by the Egyptian central bank to improve regulations and supervision, the banking sector remains characterized by a weak financial profile of the country’s banks – particularly with regards to public sector banks – due to a weak operating environment and to a slowdown in the economy and in structural reforms that started in 1998. A challenging economic situation and regional uncertainties, combined with weak industry fundamentals, are expected to keep the banking sector under significant pressure in the medium term, especially considering that most Egyptian banks are not well equipped to face unexpected shocks.

For the moment, the Egyptian banking sector suffers from poor underwriting skills and asset quality, low profitability and under-capitalization of the state banks (the four largest banks in the country) and of some of the private banks, a low level of automation, underdeveloped risk management systems, low level of disclosure and high reserve requirements, which hamper efforts to spend in other areas where investment is urgently needed. The experience of Jammal Trust Bank (JTB), the only Lebanese bank to have courageously ventured into Egypt in times of state dominance, should serve as a good example to other Lebanese banks with expansion thoughts in this particular market. JTB has been consistently asked by the Egyptian authorities to provide substantial amounts of capital and employ unnecessary staff (including elevator attendants and an army of makers of bad coffee).

Lebanese bankers, however, could take heart from the recent efforts in terms of regulation, as well as from the abysmal state of the local competition. A market share can be built in Egypt, provided that efforts to expand there are supported by significant financial and operational resources, and extra-competent management. Indeed, competition from the few private banks, particularly on corporate banking, should be tough.

The Syrian market has also attracted a lot of interest from Lebanese banks, since the opening up by the Syrian authorities of the local banking market to foreign banks, with Lebanese banks being particularly favored. BLOM, SGBL, BEMO, Byblos, Fransabank and Bank of Beirut have opened branches there, with Bank of Beirut even setting up a joint venture with Emirates International Bank and Qatar Islamic Bank. The Syrian market offers significant potential to Lebanese banks, which are more comfortable with this market than foreign peers. Exposure to Syrian customers has been substantial for Lebanese bankers for decades, and it is a question of the Syrian authorities developing and improving the regulatory environment before Lebanese banks start cruising in this market.

With its population of 15 to 17 million, and its growing industrial base, Syria offers interesting potential on both the retail and corporate banking sides, although there is still a lot of work to be done on the Syrian side. Indeed, not only does the country need to be rated, but banking regulations have to be significantly developed to look at least similar to those that already exist in Lebanon, while transparency, accounting standards and other important regulatory and supervisory pillars are far from being ideal.

The advantages of establishing branches or fully authorized banks abroad are multiple for Lebanese banks, with the most obvious and important being the opportunity to diversify revenues, assets, funding and capital. For the moment, Lebanese banks are constrained by the high risk offered by their economic, political and social environment. The Lebanese government’s rating is so low that it does not do justice whatsoever to the domestic banks and the banking authorities, which have worked hard in the last few years to develop a solid regulatory environment and strong internal infrastructures (risk management, treasury, banking products, etc.). This hard work is now being cancelled out by a weak and volatile environment, which is forcing banks to seek for profits and size elsewhere. The existence of large, and relatively under-developed fellow Arab countries, virtually next door, is encouraging for Lebanese bankers, who see clear expansion opportunities.

By developing and expanding into other countries, Lebanese banks would gradually cancel out the low rating tag of the Lebanese government, and would be less reliant on a unique source of income and funding (deposits). They would slowly develop into regional financial institutions, and if European and North American activities are also developed (like they should), some Lebanese banks could gain international status as well as start to be considered as universal banks. In other words, getting to become another Arab Bank would most probably be the key objective for a Lebanese bank. Jordanian based Arab Bank is one of the largest banks in the Arab world, and is one of few banks world-wide to benefit from a rating that far exceeds that of Jordan (Arab Bank has a rating that goes beyond the investment grade level as compared to the Hashemite Kingdom of Jordan’s current rating of B+). This is due to Arab Bank’s significant presence in France, the UK and Switzerland (all AAA rated countries), which dwarfs the bank’s total asset levels in Jordan, and consequently produces substantial and permanent Euro and US dollar revenues that flood into the bank’s coffers from stable and strong economies.

Finally, it is worth noting that the development of French, Swiss, US and other activities located in developed economies is not an impossible task for Lebanese banks. These institutions have the possibility, similarly to other Turkish and Middle Eastern banks, to bring their operations in the West up a level or two, by gradually entering parts of the local markets (e.g. syndicated loans, government securities trading, etc.), where they can reap some benefits. Acquiring local expertise would be one way to develop their presence in Western countries, which would be key in placing Lebanon in the map of countries with innovative and pioneering banking expertise.

The Phoenician spirit

During the civil war period, several Lebanese banks made the strategic decision to establish sister banks to the ones already established in Lebanon in countries such as France, Switzerland and Belgium and even the US. These sister banks had more or less the same shareholders as the Lebanon-domiciled banks, and were fully authorized by the French, Swiss, Belgian and US central banking authorities. The aim of these foreign entities was to channel Lebanese savings out of Lebanon in times of war and to cater in terms of banking services to the Lebanese communities, who had sought refuge in these countries.

Most Lebanese banks, which had set up sister companies overseas, still keep their foreign operations in place today. Indeed, BLOM has a successful sister bank of appreciable size in France and Switzerland (Banorabe), while Banque Audi has a fully authorized banking institution in Switzerland, which has succeeded in twenty five years to carve itself an interesting little niche in private banking. Audi also has a solid presence in New York, and even had at one stage an outfit in Los Angeles, that was sold in the mid 1990s. Other Banks, such as Byblos Bank and Banque Libanaise pour le Commerce (BLC) also saw, at an early stage, the importance of establishing domestically authorised banks on foreign soil. While Byblos chose Belgium, BLC chose to open four branches in the United Arab Emirates. A certain number of Lebanese banks also followed suit in the 1970s by establishing branches or fully authorised banks in other countries, such as Banque Saradar and Fransabank in France, or Jammal Trust Bank in Egypt.

Today, the reason for setting up shop elsewhere is aimed principally at following a new breed of Lebanese economic immigrants. While the objective to escape from Lebanon is still present, this time it is more to flee from an inhospitable economic environment rather than a war. The reasons, for overseas expansion are now dominated by different parameters, of which the most important remains the diversification of revenues away from a very risky domestic economic situation.