Against all odds Lebanese banks have been weathering the current economic and political crisis. In spite of the numerous political shocks Lebanon faced in the last two years, the banking sector still managed to show healthy performance levels.
“The Central Bank of Lebanon (BDL), since the mid- 1990s, has adopted consistent strategies in the economic, monetary and banking domains. Thankfully, these strategies have proved to be successful,” said Roger Dagher, Bank of Beirut’s CFO. The BDL has been able to greatly contribute to the sector’s strength and resilience to political and economic shocks while the banking sector in Lebanon is often deemed as the most prosperous industry driving the economy.
“The central bank is mainly in charge of the monetary policy and its prudent approach has been very successful as witnessed in the recent banking sector results, more particularly in view of the current situation,” confirmed Samih Saadeh, General Manager of Banque BEMO. The manager accredits the central bank with involving commercial banks in the effort of supporting the economy in an effort to segregate it from the political arena.
The BDL has relied on three strategies in order to strengthen the banking industry. “They have controlled efficiently interests on debtor and depositor accounts, by coordinating their efforts with banks. They have also managed extremely well the foreign exchange market, intervening directly when needed. Finally they have monitored quantitatively and qualitatively the sector with the help of the banking commission,” explained Alain Hakim, Assistant General Manager at Credit Libanais. Among the other contributions of the BDL to the banking sector is its coordination with the government to efficiently manage the public debt, issuing series of regulations that tackle most of banking issues, including conforming to prudential limits and ratios in different areas such as liquidity, capital adequacy, lending limits, related parties lending, setting up the risk management culture and best practices, establishing corporate governance guidelines and introducing and implementing the Basel II Accords.
Basel II
According to Walid Raphael, Deputy General Manager at the Banque Libano-Française (BLF), BDL Governor Ghassan Salameh has actively supported the Lebanese pound and helped boosting confidence levels in the banking sector. “All Lebanese banks have complied with Basel II while other emerging markets are still struggling with the implementation of such international standards, including the United States. The adoption of best practices is facilitating the entry of Lebanese banks into new markets as well as promoting the reputation of the central bank with regulators elsewhere,” he added.
Nonetheless, the banking sector is plagued by the political volatility that has become Lebanon’s reality. The Lebanese commercial sector is still recovering from the aftermath of the July 2006 War. “The 2006 events were undoubtedly a major blow to Lebanon, but the general repercussions had no real impact on banks, whose activities continued to grow significantly. The banking sector has been able to attain similar levels of activity a few months ago, compared to the ones prevailing before the July War,” underlined Anthony Usher, Chief Executive Officer at Standard Chartered in Lebanon.
Despite the dire economic situation in Lebanon during 2007 deposits, whether based in dollars or Lebanese pounds, still managed to rise. Credit Libanais’ manager underscored that while the first segment’s incremental difference may be partly attributed to high interest rates accounting for the country’s risk, the second category remains constant essentially due to the profile of account holders. “Accounts in Lebanese pounds are essentially held by retirees or individuals belonging to the lower income bracket who are extremely loyal to the local currency, making this particular currency denomination segment very viable,” said Hakim who does not perceive interest accumulation as the only engine to growth in deposits when daily consumption figures are taken into consideration.
An important factor accounting for the banking sector’s relatively healthy growth levels are remittances, of which Lebanon receives some $6 billion every year. “The bulk of this amount flows directly into the banking system, which retains a fair sum of it,” said Usher. The CEO also estimates about 50% of the banks’ deposit growth to be stemming from the Lebanese diaspora living overseas. “The economy largely functions on these inward remittances and on the banking sector,” he added.
Evidently, Lebanese banks have shown resilience to political and economic shocks and even to security tribulations due to certain factors. As Dagher declared: “There is no secret; this resilience is due to the constant inflow of funds from the sizable and affluent Lebanese diaspora and the adoption of a regional expansion strategy that provides means of diversification, both in terms of income and risk.”
Real estate dynamism
In terms of loans, growth has also been significant in recent years. According to Saadeh, loans to deposits have increased by 15% in the last two years, and banks are diversifying risk by looking into new forms of personal retail and corporate lending. The largest economic sector currently profiting from institutional lending is real estate because of the sector’s dynamism and the sheer size of projects underway.
Hakim does not believe, however, that the banks’ staunch support for the Lebanese government, through financing the public debt, may hinder the private sector. “Lebanese banks are investing and financing local consumption whether in terms of white or black goods,” he said. Lebanese commercial banks also grease the economic wheels through loans destined to SMEs or others done in conjunction with the government such as kafalat, targeting particular economic sectors namely agriculture, IT or tourism.
Some institutions, such as Bank of Beirut, reckon they are continuously gaining additional market share in all areas, and more particularly in lending activities. “The strategy adopted few years ago focusing on the retail business segment strengthening the already well- established commercial lending activity has paid off. We are hence witnessing a remarkable growth in our retail franchise. In fact, we are almost doubling the figures every year and on the commercial lending front, we are the leading bank in trade finance activity, and we continue to gain new markets every day,” said Dagher.
Hakim also attributed the growth of the banking sector to expansion in consumer and SME products. According to BOB, the bank has been able to enhance its asset base which has soared from $40 million at end of year 1992 to $5.3 billion at end of year 2007. Dagher believes the bank’s outlook for 2008 to be very positive in all areas. Raphael agrees, saying “all sectors are actually experiencing strong growth whether in terms of retail, trade finance, private banking, or brokerage services.” The deputy general manager explained that due to the emergence of new product categories, there is still room to grow in certain specific segments. Banking secrecy also seems to provide Lebanese banks with another competitive advantage, as opening accounts in Lebanon is relatively easier than in the US or Europe where KYC requirements are much more stringent.
Calculating risk
In a country where political instability as become inherent to the country’s landscape risk is an essential element shaping bank strategy. “On the local level, the country risk has translated into higher interest rates on depositor accounts,” Hakim pointed out. He emphasized that he default risk is, however, well controlled by banks that have closely followed requirements imposed by Basel I and II. “Naturally, risk is also shaped by the banks’ strategies and exposure levels,” he added.
How does Moody’s low rating of Lebanon affect the banking sector? Standard Chartered’s CEO admitted that lower ratings have deterred his bank from purchasing any new government paper. Nonetheless, he added, “in our view a default, while possible, is unlikely in the absence of catastrophic political developments. In spite of the extraordinary difficulties it has faced in the past, the Lebanese government has never defaulted, which is quite extraordinary for an economy that has been through so much.”
This surprising state of affairs can be also partly attributed to the BDL’s ability to bolster its currency reserves due to inflows of remittances. The central bank’s gold holdings have more than doubled in value over the last few years, observed the Standard Chartered CEO who believes that the government reserves are in a better position now than they were during the 2006 War.
“The government’s finances have also progressed mainly due to healthier revenues from taxes and the reduction in the cost of borrowing with the use of financial engineering mechanisms as well as rewriting Eurobonds,” he added.
So how does the sovereign debt weigh on the Lebanese banking sector? Like all international banks, financial institutions in Lebanon are exposed to various risks, whether liquidity, credit, market, operational, and other risks. “As we cannot eliminate those risks, the challenge is to effectively manage them. The key is to promote the risk management culture within all the bank’s sections, starting from the board of directors to all employees in each department,” Dagher pointed out. Hakim also underlined that the sovereign debt remains under control when compared to banks massive assets. As Hakim averred, “Under BDL’s management Lebanon will never face a crisis comparable to the one that hit Argentina.”
In order to mitigate risk, Lebanese banks have decided to expand abroad. For many financial institutions around the country, beefed up by a large staff and high level of expertise, the Lebanese market has become too limited, a reality that has initiated a wave of regional expansion. “Countries in the region are in need of expertise in the field of banking, especially in light of the unprecedented wealth witnessed by the Gulf nations. Lebanese financial institutions have such know-how, in addition to the similarity of language and culture, which is thus promoting joint ventures between Lebanese and Arab banks,” said Saadeh.
In order to adapt to the market needs and to shape their expansion abroad, banks have opted for various strategies. Credit Libanais’ approach focuses on Lebanon and the Lebanese population, whether living in the Land of the Cedars or dispersed around the world. “This specific targeting of Lebanese has prompted our expansion abroad as we tend to follow our customer base. Our Canadian branch caters for Lebanese Canadians, while our Bahrain office targets Gulf countries’ Lebanese residents. Finally, our Cyprus operations reach towards the Lebanese immigrants established in Europe,” Hakim said. Banks are actively seeking a larger piece of the pie within the segment targeting the Lebanese diaspora. “Lebanese clients residing abroad want different products in relation with their home country such as real estate loan as well as deposit related products with many preferring to invest in Lebanon due to higher interests on deposits,” Hakim added.
In order to tap into the Lebanese diaspora market, some banks have opted for a network of representative offices or individual branches. “In such a framework, investments are minimal while profitability levels are maximized” said the Credit Libanais manager who underscored, however, that many Lebanese banks have also been engaged in building a complete network abroad. “Regardless, the goal of banks who have expanded by opening a limited number of branches or rep offices is not to compete with local financial institutions but target the Lebanese niche market, by providing complementary products,” he said.
Targeting customer groups
As members of the Lebanese diaspora feel a strong connection with their home country and as many are convinced they will be coming back to Lebanon at some point, they tend to invest some of their fortunes in local property. “For Arab investors Lebanon is also affordable in terms of real estate value, which explains that in terms of banking this sector is the strongest sector we have by a long way,” highlighted Usher.
Among the other strategies favored by some banks is market specialization. BEMO’s approach relies on targeting successful entrepreneurs and high net worth individuals. “We concentrate on a relationship approach with most of our clients who can seek the advice of our specialist any time any place. On the level of corporate banking, we feature in our books most of the largest corporate clients in Lebanon,” said Saadeh.
On a micro-strategic level, Standard Chartered is also developing products targeting SMEs. “The SME segment is an area we have wanted to penetrate for some time now; the timing is just right for us to become more active in this sector. We have an excellent cash management account and we will shortly be launching a loan product to be followed by trade finance later on, which will enable us to offer our clients a full line of products,” explained Usher. In terms of Islamic finance, Standard Chartered is still looking into this particular segment but it does not rank high on its priority list as the bank is currently aiming at building market share by means of organic growth.
Market trends defining the banking industry have been mainly divided between a further specialization of institutions and the adoption of a universal approach. In terms of strategy, the largest banks have favored a universal banking strategy, by providing as many banking services to the customers as possible. “Banks can either specialize or try appealing to the mass. This approach will, however, vary from one country to the other and is ultimately defined by the market,” reckons Saadeh. BEMO’s strategy in Lebanon has been quite specialized, while in Syria, where the bank made an early entry, it favored a more universal approach to banking.
Retail banking has become a leading trend while private banking is evolving gradually on the Lebanese arena. “I would say that the professional service is until now offered mainly by the international banks and not the Lebanese ones. I think that this business needs more time to mature,” added Dagher.
Forecast
Hakim holds that in the long run the market is bound to naturally re-segment itself. Although the largest banks have a universal approach, the activity is segmented within the institution. “In Lebanon, the market’s limited size can account for the lower levels of segmentation,” the Credit Libanais manager said.
Surprisingly, one of the less prevalent trends is the consolidation of the banking industry, although consolidation processes allow for a more efficient banking system. Lebanon is also still waiting for a new merger law, yet to be approved by the parliament, which might be postponed to the next parliamentary sessions in October 2008.
Regardless of the context, mergers and acquisitions are a natural evolution of the sector. This might be facilitated as the banks’ founding families come into their second and third generations, progressively becoming more open to the idea of consolidation. “Economies of scale and implementation of Basel II will also pressure banks into seeking consolidation,” added Saadeh. Usher agreed and underlined that Basel II requirements will force small banks to merge rather than to attempt to raise new capital. “There should be definitely more consolidation but the current instable environment does not promote mergers which ultimately require higher confidence levels,” added Semaa Bassil, Vice Chairman of Byblos Bank.
Some bankers also believe that the structure of small bank in Lebanon do not offer attractive opportunities because of, on the one hand, the relatively high price and, on the other, the lack of proper synergies. “If the Audi merger actually comes to term, it might push the industry into seeking favorable synergies,” Dagher hopes.
Many challenges remain. Other than the usual financial risks, the country is confronted by a fragile political environment, a considerable public debt and an overleveraged private sector. The large Lebanese banks have been able to cope with these challenges with the cooperation of the BDL, hoping that the new positive political events will shortly contribute to speed up the reconstitution of the public confidence, re-launching of the economic and fiscal reforms and achieving real growth.
As Dagher summed it up: “The role will be intensified and we will see more penetration in many regional markets. However, I would stress the issue of bank licensing in the region and especially in the Gulf area. Lebanese banks are still facing many regulatory obstacles for entering some markets in the region. I truly believe the markets should be open, of course within the highest standards of banking regulations, and competition will judge which bank will succeed and which will not.”
