The Byblos Bank Group, Lebanon’s third largest financial group, started the year 2006 with decisions to list all its shares and increase its capital by a massive amount, right on the heels of a $164.8 million rights issue by which the bank doubled its share capital to $329.6 million in the last quarter of 2005. EXECUTIVE inquired with Semaan Bassil, vice-chairman and general manager, about the latest strategy moves of Byblos Bank, whose new joint venture subsidiary in Syria also started full operations last month.
E After increasing its capital not long ago, Byblos Bank is preparing for a full listing of its shares on the Beirut Stock Exchange and is also considering a further capital increase. Could you outline the development of Byblos Bank’s new relationship to investors and the Lebanese stock market?
In the past, Byblos was mainly focusing on building its business in Lebanon and the region and it didn’t approach institutional investors with a lot of PR. That was because we sensed up until recently that nobody was interested in Lebanon and there was little trading.
Then a number of things started happening concerning Byblos and the market. First, there was more optimism in Lebanon after the new government declared all the reforms and started preparing a new page in the country’s history and because of the changes that are happening.
On our part, after feeling the need to expand our markets further, we said it is a good time to strengthen our capital and also to make Byblos better known among institutional investors. Thus we held two road shows in the past three months, in Europe and the United States, before doing our capital increase – I am talking here about the previous capital increase which we already closed, not the one that we might have in the near future. Several institutional investors looked at Byblos and saw that Byblos has a good story. They saw regional expansion built upon a strong local franchise, plus they saw that our P/E ratios were very low compared to other banks listed. The foreign institutional investors, who didn’t know Byblos before because we were not advertising our bank, really discovered Byblos and three to four institutional investors took between 1% and 2.5% each.
E How did this influence the performance of Byblos shares in context of the overall market development?
At that time our share was trading at $1.5, and even less. After the road shows, a lot of interest emerged from the Gulf and from Lebanon, and the ball began to roll. The price of Byblos started to go up, as did that of the other banks. All the banking shares are being traded actively by Gulf investors and also by Lebanese. But because Byblos started from a very low base, it went up very rapidly.
E Do you see a new environment on the bourse?
Up to perhaps the last quarter of last year, daily average trading on the Beirut Stock Exchange used to be around $1 to 1.5 million. Then suddenly in the last quarter of 2005, daily volumes reached $15 million, and today, it reached $40 million.
E Is this what led you to list all your shares on the BSE?
Until now, we had only one third of our shares listed. The main reason why we are listing all our shares is because there is an appetite, which had not been the case before. We said, since there is an appetite on Byblos shares today, why don’t we list all the shares to create more liquidity and satisfy all this appetite?
E Has everything been set for the measure, including the date?
Because there is already demand on our shares and we want to satisfy this demand, the step is imminent. What we are waiting for now is approval from the Central Bank and the BSE. This is an administrative issue and we expect the listing within two to three weeks, in early February. The date is just an administrative matter.
E As the second step after the full listing, you would look at a new capital increase. How would this increase differ from the one you did last year?
The reason why we did not list our last capital increase in any exchange was that it was an increase through a rights issue for the current shareholders. It was not open to the public unless some shareholders decided to not subscribe and sold their rights. The future capital increase that we may do will take different options into consideration, as the bank wants to make sure that we list where we can achieve more liquidity and more exposure of the bank to international investors.
This is always under the point of view where the investor feels more comfortable. We are moving from being inwards and only looking at our business to becoming closer to the investors in our shares.
E Do your have your eyes set only on the BSE or would you also consider listing in other markets, such as the DIFX or a European exchange?
It is not limited; it could be on one, two or three exchanges, depending on where it adds more value to the investor. We could list in London, Dubai, other Arab markets, whatever decision we take will be to see added value to the investor. What we want is to increase liquidity and facilitate trading to local and international investors, this is our concern.
E Is it correct that you are considering a range of $300 to $400 million for your capital increase?
The range which we are considering is actually between $300 and $450 million. But this will become final after we finish our due diligence internally, because we want to make sure that any capital increase is bringing added value to the bank.
E In parallel to your own capital increase, Lebanon’s two other large listed banking groups, Audi Saradar and BLOM, have also been involved in major steps for raising their capital above the $ 1 billion mark. Are you three a new breed in the Lebanese banking sector?
The reason why I think that these banks are differentiating themselves is that they have been going international. Because what do they actually need the capital for? It is to buy banks or strengthen the capital of banks that they have already set up overseas.
E Do you see a growing gap between the three and the rest of the financial industry in Lebanon?
Yes, because this is already evident in the market shares. The number one has perhaps over 16% in market share and the second one is not far behind. Then it drops to 10-11% which is our share, and then it goes lower. There is increasing concentration, because larger banks are becoming larger because of their aggressive strategy by buying banks locally or going outside.
E Would you identify further differentiation marks that allow these banks to expand on several levels at once, other than sheer size?
The reason why they can do that is not only that they have the capital but also that they have the system and the people. Capital, as you know, is very easy to bring. Two factors are involved. Banks first have to be open-minded to open their capital, because to open the capital dilutes existing shareholding, and that requires a level of maturity. Secondly, you have to have the system and people, to deploy the capital in an effective way. Some banks have been investing in system and people and can deliver this readiness to open up and the capability to deploy the funds.
E Are there any potential downsides affiliated with this trend and with raising capital by such large margins as we are seeing?
The challenge for Audi, BLOM, and us in increasing our capital is to be able to maximize the adequate return on this investment in an acceptable period. When you increase your capital, you dilute your shareholding, so the P/E ratio will go up. The challenge is how quickly the banks will be able to deploy the capital and get returns. The more the banks are ready in terms of system and people, the quicker they will be able to convert this capital into adequate returns.
E How about the issue of competitiveness? Does it increase the challenge if the three banks expand into larger markets and thereby might venture into territories that bigger regional banks in the GCC might be interested in?
I am going to places where the spoilt GCC banks will not go. By spoilt I mean that most GCC banks either do not pay interest on their deposits or have easy funds from government agencies. They are self-sufficient with siphoning profits in the easy way of doing money. These banks are not going to go into markets where we are going, like Sudan, like Syria, or like Algeria. I don’t think that banks in the Gulf are ready to go into these markets yet, because they are not used to these difficult markets.
E What are the longer-term perspectives on this issue of increasing competition?
In the longer term, this is a challenge for banks like us. Today, we have been in Sudan for three years. If we stop developing in Sudan and sit on our laurels, this is definitely a wrong strategy. Sooner or later an Arab or even a local bank will come and start driving the rates down. That’s why the bank is expanding the network and is not limiting itself only to lending to international corporations but trying to learn the market and with time go into the middle market and even consumer banking. It is the strategy of Byblos to go into such markets to build home bases, not only to set up one bank branch which was the traditional way for Lebanese banks which have set up their European subsidiaries which mainly were following the Lebanese clients.
E It seems that Sudan has already started attracting a measure of interest from Gulf investors, in areas such as real estate. Couldn’t that also extend to finance?
I can tell you that today there are five new banks that open up in Sudan but four out of the five are not banking groups. They are only private investors who believe that by having a lot of money and setting up banks, they can make a lot of money. Of course, this is going to affect prices and create competition. But it is our advantage that as a bank, we run the bank in Sudan and provide all the back office from Beirut, because we have the organization.
E Markets in Algeria also have shown a recent development due to the country’s growth in oil and gas revenues. Were you lucky in choosing Algeria?
We must be always lucky. When we chose Sudan, we were told we were lucky. When we choose Algeria, we are told we are being lucky. I think it is having a vision and be forward looking.
E Do you expect financial markets in Algeria to pick up in the near future?
We should be careful because Algeria has for years been talking about privatization and has been accumulating large foreign reserves. Algeria has a huge potential but the issue is that they are slow. They don’t have yet a real financial market or stock market and 80% of the economy is state-owned. It is the right moment to start looking into this market but it is going to take time and that’s why we are there for the long term.
E The slowness of processes in Algeria also seemed to have some bearing on the completion of your acquisition of Rayan Bank. Is the licensing issue progressing slower than hoped for?
Yes, but that helped us in a way because in the meanwhile we used our time and efforts to start operating in Syria, where we are now fully operational since December and, besides the head office, acquired one branch location in Damascus. Thus I think the situation in Algeria is positive in the sense that the opportunity is still there because things are slow and because we are not just sitting there and waiting for the license.
E To return once again to the capital increase, do you have a dream composition of the shareholding structure in Byblos bank after going fully public and increasing capital?
In any market, you need a little bit of everything. You need the institutional investor, you need the individual investor; you also need speculators, because these three forces make the market. We would like to have a combination of investor profiles; it will be great if we have most as medium term investors, in order for them to give us sufficient time to prove to them that we can give added value. That’s why we sometimes try to focus on these investor profiles when we do road shows. We believe in the story we tell them, we believe in the management they see, that the company can add value over the next three, four, five years.
E Could you already provide us with any numbers regarding your results in 2005?
I would say the results for 2005 are very encouraging. We are very conservative in that we don’t like to make too much publicity in advance but I think shareholders this year will be very much satisfied. Just to confirm the result of our expansion, I can tell you that in 2004 the international operation represented 4% of total profits. In 2005, it represented 14%. What I am trying to say is that the growth in our business and the profitability levels will mainly come from outside Lebanon and then would pick up in Lebanon when the reform would happen and provide more lending opportunities.
E Would you set any ceiling to the share of international profits in the revenue structure of Byblos Bank? Would it worry you, for instance, if the international profit share would hit 40 or 50%?
No, if I can reach 40 or 50 [%], I will be very happy – because I am entering into markets that are new and I want to be the leader in those markets.