“Our real GDP for the year 2011, according to national estimates, exceeded 5 percent in light of the significant improvement of activity following a freeze in the first months of the year.”

“Supply from the Middle East has been reliable despite perceived disturbances in the region… there is no shortage of oil.”

“We want a price around $100, that’s what we want.”

“We made a revolution only to go now from one dictatorship to another.”

“Europe is watching us, austerity can no longer be the only option.”

“German chancellor Angela Merkel has to know that the politics of austerity have suffered a humiliating defeat.”

“Grexit [the possibility of Greece leaving the Eurozone] path: election, default, exit, capital controls, deposit freeze, drachmatization of euro claims, depreciation, return to growth/jobs.”

“This puts egg on our face and we deserve any criticism we get.”

“Jamie Dimon, the head of [JP Morgan], is one of the smartest bankers we have got, and they still lost $2 billion and counting.”

“There are issues that we need to look at specifically with respect to Facebook.”

“I wouldn’t appoint somebody to do my job because nobody would run the business the way I do. You might as well have asked Frank Sinatra who he would appoint to replace him. Somebody can sing but can they sing like Sinatra? No.”

European elections and Facebook’s IPO rattled the markets last month leaving investors skeptical and perturbed. Continuing with our initiative to seek investment advice from financial experts, Executive sat with Joe Nader, head of private banking at Byblos Bank and Hatem Rafii, head of asset management at Royal Forex Trading (RFXT).

Joe Nader

Thoughts on the global markets?

Nader takes a conservative stance, as he does not see an improvement from a macroeconomic perspective. Even though the markets have corrected, he believes this is due to an “absence of bad news and optimism over a third round of quantitative easing [introduction of new money by the US Federal Reserve Bank] which has not occurred”. He does not believe that markets will go up in the immediate future.

Main concerns?

Worried about  Greece and Spain, Nader believes that we have not yet seen the worst of the crisis engulfing Europe. “I am wondering why the euro is at these levels, it has to go down further”, he says.

Markets to invest in?

His preferred market to invest in is the United States and he would go for defensive sectors such as consumer goods, utilities and healthcare. Europe would be his second choice. He does not see potential in the Middle East and North Africa except for Saudi Arabia, where he favors the banking sector.

How about Lebanese securities?

Nader recommends buying stocks at the Beirut Stock Exchange at these levels but warns that the lack of liquidity and paltry diversification of stocks is an issue in the Lebanese market. “When you invest in equities your main objective is capital gain but in Lebanon, your objective is the dividend yield because investors look at equities as a fixed income instrument.”

How about Lebanese government bonds?

Nader believes they are overvalued mainly because Lebanese individuals and banks are investing in the government bonds and “we are seeing some interest from international institutions”. He would avoid investing in them.

Your top investment recommendations?

 Cash and short-term corporate bonds in the US market.

Would you invest in Facebook?

“For a small amount why not,” he says, while highlighting that the IPO was managed badly as Morgan Stanley, the underwriter, and Facebook executives decided to boost the offering size by 25 percent and push up the price to the higher end of the range.

Hatem Rafii

Thoughts on the global markets?

 Rafii is bearish on commodity markets but very bullish on equity markets as he believes the recent accommodative actions by central banks worldwide should spur economic activity in next two to five years, leading to an appreciation of equity prices. He does not expect a repeat of the 2008 financial crisis in the near future, as the major banks in the US and in Europe are more stable and holding lots of cash.

Favorite markets?

Japan is one of his favorite markets as it is cheap and one of the top economies. “Today the top four economies are the US, Japan, China and Europe. If any of these top four markets gets cheap, at some point money will move around,” says Rafii. He expects these markets to start rallying first, followed by emerging markets. “If you have confidence, you will go to the top tier first.”

Would you buy Facebook?

“Never” he says, as it is “hard to price, it has no history and it is based on projection and hope for the future.” Rafii believes the future of the stock and of the company is uncertain. He would rather wait for a year or two before looking at the stock.

Thoughts on MENA markets?

Rafii would only invest in these markets once the top economies have gained momentum. He recommends accumulating on weakness for investors with patience and a long-term horizon.

Best ideas in the MENA markets?

 Rafii would invest in the Dubai Financial Market stock as it is a “great stock to accumulate once volumes come back to the exchange.”  He also likes the banking sector in Saudi Arabia.

Top investment ideas?

 He would buy two indices: Japan’s Nikkei 225 and the S&P 500.

“Compliance officers have a lot of powers now. The joke between bankers is that they are running the banks.”

“After a streak of eight years of positive double-digit growth in net profits, the environment is now more difficult for bank profitability. It is true that banks are still growing and standing very good in terms of liquidity, asset quality, capital adequacy and risk coverage but the level of profitability has been adversely affected by the operating environment.”

“You can not take these deposits and say I want to reduce exposure to the Lebanese sovereign to zero percent and place all my money in international markets, you will lose. You cannot convince a depositor by saying,  ‘I’m an international bank, I don’t invest with the government, all my money is outside of Lebanon’. Will he accept to be paid a 1 percent deposit rate?  Would you put your money with us?”

“In the past, banks internationally made money by taking in lots of risks, which is now forbidden. So banks have to become utilities. The decision has been taken by regulators worldwide. The real business for banks is to take deposits, lend the money, support the economy and provide services. It is going to be very challenging. Competition will be much tougher.”

“Banks are the police today. Our job is to know more about our clients than we did 20 or 30 years ago and to make sure they are not conducting transactions on behalf of other undisclosed persons. We have to do as much as we can. It is a challenging and difficult job.”

“We have sought and are currently seeking new sources of revenue to maximize our profitability levels. Some of these sources are traditional and within industry norms, such as fees and commissions, and others are more creative and, frankly speaking, out of the box.”

“A higher interest rate would give comfort to the banks to take on more government debt; but if [the government] wants to try to decrease the rate further, it will be against the benefit of the government. Banks will stop buying risk on the republic. Government should understand that they should increase the rate to a bit of a higher level.”

“There have been talks about a new world order… a shift in the balance of economic and financial power, from West to East. This could also be translated into companies that have businesses linked to the East. Such firms will need safe and secure access to international markets, especially through trade finance to support their expansion.” 

While it is still too early to assess the wider repercussions of the government- mandated wage increase this year, it is already irking Lebanese banks, coming at a time when banks are also compelled to increase spending to comply with mounting regulations both locally and internationally.

As one of the largest private sector employers, with roughly 21,000 employees as of the end of 2011, the salary increases, applied to all bank employees across all brackets, are “significant money,” says Nassib Ghobril, chief economist at Byblos Bank. As of February 1, the government has raised the minimum wage by 35 percent to LL 675,000 ($450) while increasing salaries by an average of LL 299,000 ($200) for income brackets above LL 675,000.

“As competition for talent in the region was increasing in previous years, we had to raise salaries and so we had already experienced a significant cost increase in the whole sector, ” says Walid Raphael, chairman of Banque Libano-Française. “Now, along with a reduction in growth of the economy, we are imposed with an increase in the cost of human capital. This has a major impact on the sector.”

In the first three months of this year, staff expenses at Alpha banks — the 12 banks with deposits in excess of $2 billion that account for 85 percent of the banking sector’s deposits — were up by 12 percent year-on-year to total $293 million, according to research firm Bankdata Financial Services. By comparison profits totaled $370 million during the period.

While the banking sector has strong fundamentals — it is still witnessing growth in assets and deposits albeit at a slower rate — its declining growth in profitability is making it more difficult to swallow the additional costs, a pain felt more vigorously by the smaller banks than the larger ones. “For the big banks which have large enough profits, they can manage, for the smaller ones, it is more difficult,” says Fadi Osseiran, general manager of BlomInvest Bank.

The regulation burden

The increase in salaries has been accompanied with an increase in costs for complying with additional international and domestic regulations — more software and staff needed. Those new regulations include Basel III and the United State’s Foreign Accounts Tax Compliance Act, while domestically Lebanon’s central bank has introduced new regulation aimed at curbing money laundering.

While the actual cost of compliance has yet to be calculated, the smaller banks are in a less favorable position to absorb the shock — as reflected by the drop in profits of the total banking sector relative to the Alpha banks. The sector’s growth in profits dropped by three percent in 2011 but the Alpha banks’ profits were up one percent, highlighting the struggle of the smaller banks. “Given that competition is increasing and that the larger banks are better prepared to face competition, I think the smaller ones will be impacted the most,” says Ghobril.

To pull through in more difficult times, consolidation may have to be considered. “We have been hoping that consolidation would eventually happen and it did not,” says Raphael, who added that he expects this to change. “We need the right people with the right skills, we need to train them so it is becoming a big burden for smaller banks.” 

 Jean Riachi, chairman of FFA Private Bank, believes that as competition  gets tougher, smaller banks will have to merge with larger ones and he expects this to take place “in the future.”

As Byblos’ Ghobril says: “When you have a growing pie, there is enough for everyone but when the pie stops growing, then definitely the better prepared players are ready to adjust to this environment.”