Following the failed merger talks between Banque Audi and Banque Libano-Francaise in 2002, few anticipated the announcement of last month’s $159 million merger acquisition of Banque Audi and Banque Saradar. Moreover, such a merger differs significantly from the type of consolidation sought by the central bank, namely a consolidation of the smaller, less efficient, banks in the country. Nevertheless, the announcement of the Audi-Saradar merger took the market by surprise at first, only to make significant sense as details of the transaction began to trickle down to the market.
The deal ($100 million in cash and $59 million in shares), will lead to the creation of the largest banking group in the country and have significant implications on a number of levels related to the banks themselves, the banking sector locally and regionally, and Lebanon’s economy.
Banks in Lebanon have been facing a growingly competitive domestic environment over the past few years, not to mention the significant difficulties such banks are facing when attempting to venture into Arab markets. Lebanese banks lack the scale, efficiencies, and branding to establish a strong presence on the turf of banks like Saudi American Bank, National Bank of Kuwait and Arab Bank, among others. In that regard, the sheer scale of the combined Audi-Saradar entity provides the group with the cornerstone upon which to build a regional platform. With total combined assets in excess of $9 billion ($12 billion including fiduciary deposits, security accounts, and assets under management), the group begins to close the gap with the likes of Arab Bank, whose assets at year-end 2003 reached almost $24 billion.
There are also a number of financial, human, and commercial synergies that underline the drivers of the transaction. Both banks achieved significant growth rates over the past few years, with Banque Audi’s total asset and deposit growth reaching 38% and 42% respectively in 2003. In parallel, Banque Saradar’s total assets and deposits increased by 11% and 13% respectively over the same period. With such growth rates achieved individually, the now combined entity is likely to generate additional growth, and further widen the gap with other leading banks in the country.
Prior to the merger, Banque Audi benefited from a strong grip on the retail commercial banking market in Lebanon, gaining significant ground on retail-oriented competitors, including large banks, such as Byblos and Bank of Beirut, in addition to medium-sized retail banks, such as Al Mawarid. Saradar, on the other hand, benefited from a strong grip on the private banking and investment banking market in Lebanon, while lacking the retail aspect of commercial banking. With the consolidation of both banks into one entity, they have successfully created one banking corporation that can provide the full range of services, targeting both retail consumers and those seeking personalized private banking services. In that regard, the new entity might introduce a new competitive spirit to a sector in which few banks can efficiently provide a full range of financial services. However, customers of smaller banks in Lebanon typically favor such small-sized institutions because they offer a more personalized banking approach. As such, they would be less at risk than larger institutions – with the latter perhaps seeking to engage in M&A activities – seeking complimenting banks to merge with, in an effort to ward off any erosion of their market shares.
On the commercial front, both banks’ commercial strategies highly compliment each other. Banque Audi is highly aggressive on retail banking, dishing out new products for end consumers almost on a monthly basis, coupled with a range of insurance services through its Libano-Arabe subsidiary. Banque Saradar is more private banking oriented, with efforts to target the high-income high-net-worth individuals and groups in Lebanon and abroad. In that regard, the banks compliment each other in such a way as to target the totality of the market, from the low-income retail customer to the high-net-worth Lebanese and Arab individuals.
Moreover, both banks’ organization and personnel structures are highly synergistic, sharing many similarities in their overall culture and management approach. Such synergies were emphasized by Raymond Audi’s statement that “[the] two banks share the same values within an overall corporate culture based on integrity, transparency, innovation and quality.”
As per the terms of the merger, the Saradar shareholders will receive shares amounting to about 9% of the combined entity. As such, the new merged bank will benefit from a strong shareholder base, combining prominent Lebanese shareholders with well-connected high profile Gulf-based shareholders. In that regard, Banque Audi has historically sought to acquire certain institutions to benefit from their well-established regional shareholders, as was the case with the acquisition of Lebanon Invest.
It should be clearly outlined, however, that the Audi-Saradar merger is not limited to the banks themselves, as it has significant implications on the banking sector in Lebanon, the region, and the Lebanese economy.
The primary implications are certainly on Banks Audi and Saradar themselves. However, such implications are likely to coincide with the factors that drove the banks to merge in the first place. As such, the implications are likely to be mostly of a positive nature, capitalizing on the synergies between the banks. The combined efforts of Audi and Saradar are likely to further boost growth in deposits, loans, and overall assets, and are thus likely to further reinforce their position as the largest banking group in Lebanon.
Now we should see other big banks such as BLOM look at alternative routes to preserve its position in the Lebanese and regional market. Industry experts indicate that a drastic strategic change, although perhaps necessary, may not fit as well within BLOM’s culture. In fact, despite its scale, BLOM remains a “family-business,” much less institutionalized than Audi and Saradar. At Audi, the bank’s management consists of a team of professionals from various backgrounds, which have no major shareholdings in the bank. At BLOM, the bank’s management is tightly in the hands of Saad Azhari, vice chairman, and son of the bank’s founder and major shareholders. In this regard, BLOM may be less willing to open up its capital to other institutions or investors. Nevertheless, certain market developments that may endanger the bank’s position in the market may finally drive the Azharis to succumb to pressures and engage in the M&A route.
The word on the street is that the Audi-Saradar merger is the necessary trigger to the much-awaited wave of consolidation in the Lebanese banking sector. Essentially, this would be true if the proper drivers behind the transaction are clearly communicated to the market as incentives for others to follow suit. Moreover, the synergies between Audi and Saradar may not be so evident to other banking institutions in the country. Nevertheless, many banks in Lebanon realize the eventual necessity of consolidation, as they face the competitive risks brought forward by local and regional large-scale banks. In that regard, they are also heavily supported by the central bank, which is favoring consolidation in an effort to reduce the fragmentation in the sector and improve efficiencies. It is likely, however, that other banks will closely watch Audi’s ability to successfully consolidate its operations with Saradar as a precedent to taking any such actions themselves.
It was clearly articulated by the chairmen of both Audi and Saradar that combining the two entities significantly enhances their chances of successfully expanding regionally. This would certainly make sense given the necessities required to establish a presence in Arab markets. The GCC banking environment is highly competitive, requiring aggressive marketing, scale, advanced IT systems, a full range of banking and financial services, professionalism and efficiencies. While some Lebanese banks may achieve some of these characteristics, none actually benefit from the combination of such parameters, certainly not to the scale required by sophisticated Arab investors. Eventually, however, Lebanese banks will have to make some defensive move to defend even their local market shares, as the large-scale Arab banks have been somewhat successful in venturing in the Lebanese market, and many have been able to carve themselves a significant market share locally.
On a more general note, the Lebanese economy stands to be greatly affected by such a consolidation in the sector. In the short-term, the economy may be ill-affected by the higher degree of unemployment that typically results from consolidations. On a longer term basis, larger, stronger and more efficient financial institutions offering a full range of financial services, up to international standards, may allow the country to regain its role as a regional financial hub – a role taken away by Bahrain and Dubai.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG).