All seems relatively quiet in the Lebanese banking world, for now. Lebanon’s banks are still growing. They are still making money, too. While their profits are not swelling at the same double-digit rates as in the past, the fact that they are still in the black is welcome news given the fatigued economy and appalling regional circumstances.  And the banks are still funding the needs of the people and the government without jeopardizing their liquidity.  They are able to do so because of a still steady growth in deposits, the key health indicator for Lebanon’s banking sector.

Deposits still flowing in

Behind the scenes, CEOs and their senior managers are no doubt rolling up their sleeves and working day and night to overcome yet another crisis, one that has lasted longer than expected and with no end in sight. The total size of the sector stood at $159 billion as of the end of September, up 5 percent since the beginning of the year. Customer deposits grew by $6.6 billion in the first nine months of the year — a 5 percent growth rate over last year — with the bulk coming from residents. Chief economists seem relaxed and are not sounding the alarm yet. Bank Audi’s Senior Manager Marwan Barakat estimates that deposits need to grow by 5 percent annually in order for the banking sector to continue meeting the needs of consumers, corporates and especially the greedy sovereign. Nassib Ghobril, head of economic research at Byblos Bank, is satisfied with the average $800 million a month of deposits seen in 2013, but warns that $2 billion flew into banks’ coffers this year following the Cypriot economic crisis as Lebanese brought back home the dough they had parked in the neighboring island. “If you remove that amount, the monthly average would be lower, but we will take it,” says Ghobril.  

The stimulus boost

With deposits still growing, the banks are extending their lending arm and still maintaining their liquidity, a much-needed feature in an unstable environment. The private sector owes banks a total of $46 billion as of the end of September, with banks handing out an additional $2.4 billion in loans in the first three quarters of the year, $500 million less than was handed out last year. That’s despite the boost from the country’s central bank, Banque du Liban (BDL). In January of this year, BDL oversaw a stimulus package of $1.46 billion, and provided the country’s commercial banks with low interest rate loans, at 1 percent, to support certain sectors. Over half of those loans were addressed to the stagnant housing sector. “Without the stimulus, we could have had a contraction in the economy,” says Marwan Mikhael, head of research at Blom Bank.

For next year, BDL’s governor Riad Salameh has plans for another stimulus package but of a smaller size at $800 million. “The first and second stimulus, especially the second one, can have a positive psychological effect,” says Ghobril. With the economy forecast to grow by just 0.7 percent this year according to the London-based Institute of International Finance (IIF), the first stimulus was a critical shot in the arm. As for next year, the IIF forecasts growth to pick up to 2.7 percent if a solution is found to the crisis in Syria; a big if. “I don’t see any factors helping the economy grow faster next year than this year. This year was disastrous. I don’t think it will be worse. I hope. 2014 is so foggy. I refuse to give an outlook,” adds Ghobril.

Give me more

As for the government, its continuous need for capital has been significantly exacerbated this year as the country has borne the cost of the ongoing war in Syria, estimated at a staggering $7.5 billion by the World Bank. The sovereign sucked up 16 percent more loans from the country’s banks in the first nine months of the year, bringing the total amount to $36 billion.

And its reliance on the banks to continue fuelling its rising expenses is unlikely to abate anytime soon, given the World Bank prediction that the majority of the war’s burden — around $4 billion — will be inflicted on the country next year, largely due to the influx of Syrian refugees, currently around 1 million and rising.
 
Replacing provisions

When it comes to the banking sector’s exposure to the fallout from Syria, all the provisions for bad loans have been accounted for: a total of $450 million. “We might have additional income when things improve” says Barakat, but it’s still too early to estimate when that will happen. Now banks are taking provisions for the domestic economy but there are no red alerts as the percentage of loans that are in default, or close to default, relative to total loans — otherwise known as the non-performing loan (NPL) ratio — stands at an acceptable 3.3 percent as of the end of September. “We have been hovering in the 3.3 to 3.5 percent range in the past couple of years so the ratio is maintained within acceptable limits” adds Barakat.

To make up for the strain on their income, banks have had to optimize costs. From freezing recruitment, to holding off on certain branch openings, to revisiting expansion plans, all the options have been put on the table of board meetings. There are currently just over 21 thousand employees in the country’s banking sector. The annual growth rate in the number of employees floated around 6 percent between 2007 and 2010 before dropping to 1 percent in 2011, the year the neighboring turmoil started, and went back to 4 percent in 2012. For this year, Barakat expects another drop in the growth of recruitment of employees. “Banks have become more careful; there is an increase in awareness of the cost factors,” adds Ghobril.

Finding profits

In the midst of these rough waters, the alpha banks — those with deposits over $2 billion — still managed to increase their profits by 1.2 percent in the first nine months of the year, generating a total of $1.3 billion. The losses of the five banks listed on the Beirut Stock Exchange — with profits down 4 percent over the same period — were not linked to activity in Lebanon. Bank Audi saw a 15.5 percent drop thanks to the costs of its expansion in Turkey, dragging down the average of the listed banks. The double-digit profit growth rates enjoyed in the years prior to the turmoil seem long gone for now. With over 85 percent of their profits generated in Lebanon, banks’ profits are unlikely to be stellar until the economy picks up again.

And so the fight for market share continues yet again this year. With the pie not getting much bigger, banks are wrestling for each other’s slices. Smaller banks are competing by offering higher deposit rates according to economists. Last year, the medium-sized banks — those with assets between $200 million and $500 million — grew the most, with a 15 percent growth in their asset base relative to 8 percent for the entire sector, a trend that is likely to continue this year given the ongoing competition. In the midst of this heightened competition, good news and support comes from the Lebanese expatriates who are still sending remittances home. These are expected to reach $7.6 billion in 2013 — or 17.5 percent of the country’s economy — up from $7.3 billion in the previous two years.

A fragile boost

An attempt by the central bank this year to support the startup sector is unlikely to fatten the banking sector’s profits anytime soon. BDL amended a circular in August of this year in an attempt to boost the startup industry by extending interest free loans to commercial banks to the tune of 3 percent of their deposit base — around $400 million — provided the banks invest an equal amount in technology startups, accelerators and incubators. The central bank shares 50 percent of profits generated from the sale of a startup and guarantees 75 percent of the investment. According to Ghobril, this is because the central bank knows that the banks have no appetite for this type of investment. Startup investment “requires specific skills and experiences that the banking sector does not have; venture capital and private equity funds complement commercial banks and don’t replace them, so banks need time to get used to this,” adds Ghobril.

As for those banks that have set their sights beyond the country for lucrative returns, most have planted seeds in countries that have turned sour — Syria, Egypt, Jordan and Sudan for instance — and have had to put their expansion plans to bed. Their managers are in a wait-and-see investment approach for calmer days. Only a select few have ventured beyond the region in recent years, mainly Turkey for BankMed and Bank Audi, and Australia for Bank of Beirut. But so far these expansions still account for just 20 percent of the sector’s overall assets and 15 percent of their profits. Bank performance ultimately comes down to what happens at home. With foreign direct investments expected to drop by 21 percent this year, from $3.8 billion last year according to the Investment Development Authority of Lebanon (IDAL), growth opportunities in the country are getting more and more scarce.

Syria is the cloud that hangs over the banking sector. When that finally clears, the economy and the country’s banking sector will be presented with more favourable conditions to grow. Until then, banking CEOs and their boards are going to have to continue scratching their heads to find breaks in new markets in the quest for higher returns.