Samih Saadeh is general manager of Lebanon’s 18th largest bank, Banque BEMO, and has been with the bank since 2003. He started working in the banking industry in 1978 and has been a senior executive at American Express Bank-Beirut, Bank of Beirut and ABN AMRO Bank.

Bank BEMO has total assets of $1.05 billion, and if the bank’s Syrian affiliate is included, some $3 billion. In the first half of 2009, the bank’s total assets grew by 15.6 percent.  Executive sat down with Saadeh to talk about his bank’s success and gain insight into the role smaller banks play in Lebanon today.

E As a medium sized “beta” bank, how does your strategy differ from an alpha bank? What are the top priorities on your agenda?

This is a board decision, it’s the oversight of the bank. We compare our private banking to Bank Audi Saradar sometimes, yes, [but] on a smaller case though, because they have larger capital and client base. Certainly when you have a universal bank you have a larger client base, which allows you to make more money and to be more exposed.

What we’re trying to do on a smaller scale is have a boutique bank, instead of having a universal bank. I respect everybody’s strategy, I probably agree with other’s strategy sometimes — because it’s faster to make money and grow — and you come to BEMO and you see it’s very little and a bit slower.

If you want to be a private bank in this country, you really have to have political stability. If people want to believe in putting money with you, you don’t have to rely on the locals. I hope one day the political stability arrives, but this is one of the missing links in the chain to complete the services of Lebanon as a financial center. All of the potential that Lebanon has is not prospering because of the political instability. People want to trust this bank in 10 or 20 years, and this is what we are betting on. We want to build this; we want to complete this closed chain in Lebanon.

E Now, how to survive? Bank Audi, for example, has built a lot of things around their vision and one of them is private banking.

Corporate banking and retail banking need a lot of capital. You need to either open capital or get other investors. Private banking, in reality, doesn’t need a lot of capital. It needs a lot of know-how, conservatism and trust.

E What kind of customers do you cater to?

We as BEMO have a different strategy than Lebanese banks. We don’t want to play volume. We would like to grow, certainly, but if you want to grow you have to have large capital and to possibly go into retail banking. You also have to have a strategic vision for the bank, which allows you to be like any other bank. In Beirut, we’re very specialized. Our motto is ‘corporate and private banking.’ We don’t do retail banking — we do to an extent though.

Recently we started to buy some Lebanese government sovereign paper. If you want to collect deposits and you don’t put it in a sovereign bank, you have to lend it. You are bound by ratios as well, on how much you lend. There is a limitation to how large we can grow in volume. So we always look at how much we can grow in fee income, not how much we can grow in volume. Even if I get a large deposit today, I lose a lot of money. Either you put it in the government, outside, or with the central bank. Even if the central bank pays for you half a point — you lose a lot of money.

Originally Lebanese banks collected deposits — they lent around 50 percent and placed with the government and the central bank up to 55 percent. We, on the contrary, have 25 percent with the central bank, and with the government we have 3 percent to 5 percent, not more. This is why growth is a limitation to us. If you compare us to the rest, we are a beta bank in volume, but our strategy forbids us from being an alpha bank, even if we wanted to.

E How has the bank’s strategy changed since the global financial crisis struck and now after?

Banque BEMO has always had the strategy to grow to be a private bank whereby we would be acting as a financial advisor for every high net worth individual throughout their life — no matter what stage they are in. If you want to act as a financial advisor, you need to build the reputation. Building this reputation takes decades actually. We’re building on the heritage the Obegi family has, for the last 50 years. Now we have another decade to work on, to earn this trust from the people. Also, we use a business model of relationships. That means every client has his own financial advisor or relationship manager.

When the financial crisis came — and this is an approach to private banking — people stopped dealing and we make a lot of money on people making deals. So part of our income was hurt… Now, it’s catching up, thank God, the trust is starting to be rebuilt. People are getting into the market.

On the corporate side, we didn’t suffer at all. We had a certain amount of money lent, and we had lent it. In percentage, we are the highest lent bank to corporates in the country. We are lending around 45 percent of our total assets to corporates. We don’t go into the government too much.

Private banking income was a little bit on a standstill. We hope that it will catch up again.

We didn’t change our strategy, it stayed the same… we just weren’t aggressive in pursuing it in the last year. But the board decided that strategically this is what they want. They want to stay as a private, corporate bank.

E Since the financial crisis, how has your advice to your clients changed? What are the most common investments you tell them to make?

Frankly it’s not easy to let them come back. Everybody lost, depending on the extent of the loss — nobody can claim they didn’t lose… If they bought their portfolios five, 10 years ago or two years ago they probably didn’t lose — the starting point is most important [factor]. We are inviting them to come back because the markets are starting to pick up, there’s a lot of opportunity. But, be prudent at least. You have the safe investments, if you go into medical and commodities. There are aggressive and risky investments like financials. Depends on your profile. We always split our client base into categories.

E Recently, the International Monetary Fund said Lebanon’s economy could grow much faster than their previous projection of 4 percent. But, the IMF emphasized that the top priority for Lebanese banks should be dealing with the public debt. What is your take on this?

This is quite a thorny issue. Who is right? Imagine if the banks didn’t give money; what would have happened? Also, imagine that we didn’t have this flagship of the economy — the banking sector — nobody would have heard of it. The economy is built on the financial sector. Certainly, the financial sector is benefitting from lending to the government, but it’s also to the benefit of all stakeholders. We were saved from the financial crisis because our debt was local. Lebanese banks cannot stop financing the government; it’s in their interest now.

For me, the public debt is the least thing we should worry about. If we spent the same time talking about the debt on increasing productivity, the GDP of the country would soar. Recently, Lebanon’s GDP increased to $33 billion; it could be $50 billion! This year we have a growth of 6 percent, when everyone else around the world is suffering negative growth. Imagine if there was political stability; the growth could be far higher.

Debt is not a problem as long as you generate productivity!

As property prices in Dubai continue to plummet and defaults in retail loans increase, many banks are retrenching the size of their loan books. Meanwhile, mortgages remain pricey due to the relatively high interest rates in the United Arab Emirates.

According to UAE Central Bank figures, the emirates’ 52 banks (24 domestic institutions and 28 foreign) provided approximately $23.14 billion in mortgage loans during 2007 and most of 2008. DUBAIFocus, an information hub by REIDIN.com in partnership with Dubai’s Real Estate Regulatory Authority (RERA) and the Dubai Land Department, said that compared to the last year, mortgage lending in Dubai fell 77 percent in the second quarter of 2009 from $9.58 billion to $2.17 billion.

DUBAIFocus reported that the value of issued mortgages in Dubai exceeded $2.17 billion during the second quarter. In the first three months of this year, mortgages reached $1.9 billion — an increase of 14 percent from the first quarter to the second. DUBAIFocus reported that 39 registered banks in the UAE filed 1,365 mortgages in Dubai alone during the second quarter of 2009.

Abu Dhabi Commercial Bank (ADCB), the UAE’s fifth largest bank by market capitalization, issued mortgages worth $506.67 million in the second quarter through 91 transactions, said DUBAIFocus. Dubai Islamic Bank (DIB) extended $497.55 million worth of mortgages from 151 transactions in the same three- month period.

In August, Ahmet Kayhan, CEO of REIDIN.com, told Business Intelligence Middle East that the correction in the Dubai property sector is altering the mortgage scene.

“At present, the UAE is witnessing a downward correction in loan-to-value ratios as the market dynamics continue to shift, thereby making the Dubai property market more accommodating to buyers and end-users,” Kayhan said.

“With more banks offering competitive lending ratios… it is no surprise that Dubai’s mortgage market has amounted to such staggering value despite the slowdown,” he added, noting a positive trend in the mortgage market.

“Mortgages originated between mid-2007 and 2008 are expected to be in negative equity”

A road still rocky

Due to improved liquidity conditions in recent months, the narrowing gap of loan-to-deposit ratios in the UAE banking sector have allowed banks to start reconsidering issuing loans, but with extreme caution. In a special comment issued in September, Moody’s Investors Service noted the obstacles Dubai banks face with mortgages.

“Mortgages remain a challenge, especially the vintages from 2007 and beyond. The property market has declined to [second quarter of] 2007 levels during the crisis, and we estimate a further decline to [fourth quarter of] 2006 levels.” At this point, Moody’s says average property prices have gone down by 40 to 50 percent in Dubai, and by 25 to 35 percent in Abu Dhabi. “That said, mortgages originated between mid-2007 and 2008 are expected to be in negative equity and naturally prone to default.”

Moody’s went on to say that it expects default rates to reach “around 20 percent for those mortgages, as [loans-to-value] have increased due to competition over the past two years (above 80 percent). However, for the whole mortgage pool, we expect a [probability of default] of around 12 percent and a [loss given default] of 50 percent.”

Overall, Moody’s believes that mortgages make up 5 to 7 percent of the combined loan book of banks. However, the cost of mortgages are still inflated, “and banks’ mortgage pricing remains aggressive, charging interest on their internally defined ‘cost of funds’ plus margin approach.”

The two largest mortgage lenders in the UAE, Amlak and Tamweel, have substantially trimmed down their lending since the fourth quarter of last year. Moody’s noted that the two lenders “are subject to a yet-to-be-specified government bail-out plan. For [the aforementioned] reasons… property prices will stabilize at an attractive and affordable level.” Moody’s also expects “a general deterioration in commercial and retail loans” in the near future.

Stress-testing assumptions for Dubai

Individual credit recommendations

Loans go small-time

On a personal level, obtaining loans from local banks in the UAE is not that difficult, but the issue is the size of the loan. Charles Neil, CEO of Landmark Advisory, a division of Landmark Properties in Dubai, said that it is easier to obtain a mortgage for an apartment in Dubai versus a villa that can cost up to $1.1 million.

“You have to put in 30, maybe 40 percent of the value of the villa. So [the banks] are making it hard. You are seeing mortgages for the small amounts, but for the big amounts, no,” he said.

Neil explained that with Amlak and Tamweel out of the lending game, retail banks are playing a much bigger role.

“Amlak and Tamweel stopped lending altogether because they don’t have the money to lend. They are not in the market. So, [lending] is left to the commercial banks. Some have been a bit more active, [such as] the Islamic banks. But the problem is interest rates.”

In order for the property and lending market to pick up, analysts are lobbying for a lower Emirates Interbank Offered Rate (EIBOR). Yet, since its peak of 4.8 percent in November of last year, the EIBOR has recently tumbled to around 2 percent.

“The mortgage market revival is important for the property market to bounce back. Better and cheaper mortgages is surely key here,” a senior economist for MENA global markets at Standard Chartered Bank in Dubai told The National newspaper last month.

Raj Madha, director of equity research at EFG-Hermes in Dubai, believes that EIBOR and mortgage rates are related concepts.

“The mortgage rates will fall once perceived risk falls; and the perceived risk will fall when the property prices are on an increasing trend and once we know that the economy is stable in Dubai. I think it goes the other way around — once you know there is stability and growth in Dubai, you’ll see property trends going in the right direction,” said Madha.

Right now, “the main area [of concern] is unsecured lending, and then mortgages are likely to become an issue later on, just because people with mortgages take longer before they start defaulting. They look for more resources they can take out before they start defaulting… But we’re still expecting some problems on the mortgage side.”

As for Dubai banks’ lending behavior since the financial crisis, Madha noted a significant cutback.

“I would say that, really across the board, there’s been a retrenchment, but then selectively the banks are increasing lending at the moment,” he said.

Abu Dhabi leads the way

Banks in Dubai have witnessed significantly less growth, especially when compared to their brethren in Abu Dhabi.

“The National Bank of Abu Dhabi grew very strongly in the second quarter… some of the other Abu Dhabi banks are also beginning to register some growth, like Abu Dhabi Commercial Bank, Abu Dhabi Investment Bank, First Gulf Bank — all positive,” added Madha. This growth is largely due to the Abu Dhabi government’s Tier 1 capital injection into its top banks earlier this year, which sustained the liquidity conditions of these banks.

But Dubai banks haven’t had an easy ride, noted Madha. “In Dubai, we’ve seen significantly less growth. Typically, Dubai Islamic Bank is cutting back on its main product — which is lending to the real estate sector. Emirates NBD and Commercial Bank of Dubai have been a little bit more cautious about turning the taps on again,” he said. 

On September 1, the Central Bank of the UAE (CBUAE) declared its plans to lower the interest rate on the liquidity support facilities given to the banks by the government. This move was aimed at reigniting bank lending throughout the Emirates.

Still, despite the CBUAE’s efforts, most banks have remained reluctant to boost lending. This is not surprising, as banks in Dubai should lend cautiously due to the high probability of customer default.

A recent report assembled by Investment Boutique and presented by Better Homes said mortgages will continue to face difficulties in the UAE, noting that: “Although activity has picked up in recent weeks, mortgage financing will continue to be tight as local banks still need to find cost-effective sources of funding to cover their current asset-to-liability gaps and to foster more lending.”

In a recently released report FFA Private Bank has initiated coverage on BLOM Bank, with a buy recommendation and a fair value estimate of $91.6 per share, implying a price to book ratio (P/B) 2009 of 1.41 and a price to earning ratio (P/E) 2009 of 7.40.

The report pinpoints that BLOM Bank has pursued an organic growth strategy, abstaining from the wave of consolidations witnessed by the Lebanese banking sector from the mid-1990s onwards. Thus BLOM has grown organically and gradually to become a major player in the Lebanese banking sector, where it operated a network of 56 branches nationally in 2008. Domestically, the bank is the largest commercial bank in terms of net profits; as for all other major ranking criteria, it is worth noting that BLOM occupies the second position in terms of loans, deposits, assets and shareholders’ equity.

Furthermore, the report stressed the bank’s business diversification. In this regard, it is noted that BLOM has launched new segments and products as the scope of the bank has been expanded from traditional commercial and retail banking to private and investment banking, asset management, brokerage as well as insurance and Islamic banking.

Beyond its historical presence in Europe, covering France, England, Romania, Switzerland and Cyprus, BLOM’s regional expansion has been a major part of the institution’s strategy. The bank provides exposure to several Middle Eastern countries, namely Egypt, Jordan and Syria, offering potential for serious growth. Additionally, BLOM has expanded its presence in the Gulf from two branches in the UAE, to recently receiving licenses to operate in Qatar for commercial and private banking activities and in Saudi Arabia for investment banking.

As for the group’s strategy, it is noted that BLOM is currently building its corporate strategy around two pillars, which revolve around maintaining a leading position domestically and further strengthening its presence overseas to reach a balanced breakdown of earnings between Lebanon and its affiliates abroad. While the first strategic objective is to be attained by pursuing organic growth, preserving a high level of cost efficiency and consolidating its universal bank profile, the second one revolves around further expanding its branch network and scope of service in its existing countries of operation and continuing to look for expansion opportunities in countries with satisfactory risk profiles.

BLOM has demonstrated a robust performance in the last few years, more specifically in 2008 and during the first half of 2009, proving its resilience to the global financial downturn. Last year, the bank managed to expand its deposit base and loan portfolio by 9.85 percent and 25.3 percent, respectively, and its net profit by 22.9 percent, moving the bank’s earnings to $252 million in 2008 and consolidating its leading position in profitability among its domestic peers. Loans and advances grew by 3.6 percent during the first half of 2009, while total deposits expanded by 10.5 percent over the same period. Net profit of $138.3 million was declared for the first half of the year indicating a 5.8 percent year-on-year increase in the bottom line results.

The analysis and forecasts discuss that, on the whole, BLOM is set to significantly grow in size and in profitability. The analysis performed is based on the fact that BLOM will maintain a sustained level of growth in its balance sheet, as witnessed by a compound annual growth rate (CAGR) standing at a respective 12 percent and 13.29 percent for customer deposits and loans. Over the projection period, the growth will be underpinned by the regional expansion and a probable revival of the economic environment which, in turn, would lead to a surge in demand from the private sector. However, it is noted that deposit growth might be adversely affected by an anticipated upturn in international rates as pressures on the London interbank offered rate (Libor) eases.

As for the bank’s liquidity levels, they will remain ample as mirrored by the loans-deposits-ratio standing at 23.1 percent for 2008, and slightly increasing to 24.5 percent by the end of the projection period, spanning  five years.

BLOM Bank’s loans-to-deposits ratio

BLOM boasts a high level of cost-efficiency, with a cost-to-income ratio standing at 42.9 percent in 2009, which is one of the lowest in the industry. Looking ahead, the ratio is expected to slightly increase in 2009 as a result of an aggressive regional strategy revolving around the development of the Saudi and Qatari entities, as well as the deployment of additional branches in existing countries of operations. From 2010 onwards, the ratio is expected to gradually decrease to reach 40.85 percent by the end of the projection period due to the fact that growth in revenues will surpass growth in costs.

BLOM Bank’s cost-to-income ratio

Triggered by a solid growth in its balance sheet and supported by a strict cost containment strategy, as well as an increasing contribution of regional entities to the group’s earnings, the analysis indicates that the bank’s bottom line growth is expected to remain strong, as reflected by a CAGR of 13.5 percent over the forecast period. In addition, the analysis pinpoints that higher interest spreads resulting from easing pressures on Libor will likely contribute to a surge in earnings.

BLOM Bank’s net income and growth rates

BLOM Bank boasted return on average assets (ROAA) and return on economic equity (ROEE) of 1.40 percent and 17.9 percent, respectively, in 2008. These return ratios should move towards 1.51 percent and 18.5 percent, respectively, by 2013.

Finally, it is worth mentioning that the forecasts assume that the bank is expected to maintain an adequate level of capitalization, while, as a result of a rapid surge in the loan portfolio, BLOM Bank will likely face a slight deterioration of its asset quality indicators.

Marwan Salem is head of research & advisory and Raya Freyha is a financial analyst at FFA Private Bank