4Ronald Yazbeck,
Assistant General Manager, Banque BEMO

E Your bank has been involved in many diversification activities, including geographic expansion and securitization. How has this shaped your strategy for 2006?
We are still following our main strategy as a specialized bank in Lebanon, as the specialized bank in private and corporate banking. We don’t intend to change that strategy. Our focus will be on expanding within the strategy, as you can see from the opening of our first specialized branch for corporate banking in Sin al-Fil. This is our new point-of-sale. It is not a general expansion in view of regional coverage. It is more within the scope of our business, giving corporate clients and companies a dedicated space in a branch that is located in the same area as these companies and factories, where tailored products for corporate clients are available from a dedicated team and sales manager who are pleasant and available. We’re talking about quick cash, cash delivery, cash collection, and many other services.
We have also opened a branch in Verdun that is dedicated to private banking, mainly for Arab investors who have a residence in the area. This summer in the branch we will have special representation for Banque Saudi Fransi customers.
We are focusing a lot on the Gulf region by giving more push to services specially dedicated to Arab investors in Lebanon. We have been increasing our physical presence in the Emirates and Saudi Arabia – strengthened by the participation of Banque Saudi Fransi in our capital and the joint venture we have in Syria. We are always trying to support our line of business through our affiliated company BEMO Securitization, which is also a specialized financial company dealing mainly with securitization products. So we are still within the scope of our business, within our specializations, continuing to try to find growth within them. We are not expanding in other ways, like retail banking or branches. We have been successful in obtaining a very good increase in our profits for the first quarter. We are launching now a preferred share that we will be closing in the coming ten days. There’s another $30 million that was privately placed that will also enhance our corporate business by giving more strength to our shareholder equity and enhancing our ratios, which are still very far from the requested ratio internationally. We are already well-prepared for any ratio coming from Basel II.

We have a history in Syria. We are present in Syria now in a totally different way, under a universal bank, doing all the commercial business of a bank from commercial trade to retail. This has enhanced our presence in Syria, mainly on the offshore business side of the market.
But we also have very strong partners in the Gulf. The Gulf is for us an open door. It is totally different. The services we provide in the Gulf are usually tailored within the group of banks that we have under BEMO Europe, with a presence in Paris and Luxembourg. That’s a French-entity bank, completely separate from Lebanon. And in Lebanon, as a private bank, we do some business in joint venture with our European banks. Lately we have launched the family service office, which is fully dedicated to high net worth customers. It is a very specialized part of private banking in which we talk about structuring families, consolidating wealth, and auditing actual performance of portfolios of wealth. We’re not really doing wealth management directly. It’s more on a consultancy and mandate basis. That’s what we do in the Gulf. In Syria we are still private bankers. We cash deposits and work on wealth management. It’s a little bit different. The Gulf has already been fully covered by the international private banks and the big names. So going there and trying to do what the others are doing will not really provide anything value-added. Instead, we go there with a new product. Being a small bank that is fully dedicated to relationship management, we can provide this kind of business.
Stock market losses in the Gulf have convinced people that the services we sell are very important. When you audit risk, wealth repartition and wealth return, automatically you are going to see how much people have emphasized one aspect of the market, thinking that it will offer an open-ended return – which is not true. In many cases, we have seen there is a limit for everything and a return for everything. The Gulf market crashes have shown people that it’s very important to know your total exposure, to consolidate your wealth. Let us tell you where the weak points in your wealth are. That’s very important when you are talking about wealth per client which is now on average $100-200 million and not anymore like in our markets in Lebanon and Syria, where it averages between $30 million and $50 million. The difference is really very big.
We are not looking into regional expansion because we are not a retail bank. We are present in Jordan, Qatar, Abu Dhabi, Bahrain, Dubai, Saudi Arabia, Syria and Cyprus. We have enough now to conduct our business. We prefer to be small and smart.

4Philippe
El Hajj,
Head of Retail Banking Division, Fransabank

E Can you bring us up to date on Fransabank’s investment and retail banking activities? How important have they been to the bank’s operations in 2006?
Fransabank is the oldest bank in Lebanon. Its foundation dates back to 1921. It had a French name before. Within the last decade it became Fransabank. Since then it has worked as a retail bank. Three years ago, the bank decided to expand its retail presence and so a separate retail division was founded within the bank. The bank’s policy is to expand retail products and services. The bank has set a target, an objective, because it sees a substantial importance in the profitability of retail business, for the profits of the bank. On the customer side, if you expand your retail business you please the customer. And on the other hand, for shareholder value, retail business is positive as well. We have created within the retail division a business development department that takes care of improving existing products and services and introducing new ones. We have also set a mechanism for communicating with our nearly 60 branches, whereby the retail business, loan approval and so on have been speeded up substantially in a way that pleases the customer and the branch as well.

We have a 24/24, 7/7 call center. We are planning to educate our clients to use as much as possible the services of the call center rather than those of the branches. It’s difficult in this part of the world, but we are improving in that respect. When you improve the service of the call center, the client will be pleased because there is a one-stop shop for him, single window access. And our service-people in the branches will be free to do other jobs, such as sales. We have introduced new loan products, such as the car loans, the PC loan, the housing loan for Lebanese expatriates working abroad, and many types of accounts that serve the needs of clients, for example marriage accounts, ‘newly-married’ accounts, domiciliation accounts, payroll accounts and so on. Our retail portfolio over the last three years has witnessed more than a 50% increase. In the credit card sector for example, three years ago we had a MasterCard market share of 13%. That rose by the end of 2005 to 21%. I’m talking in terms of the number of cards. We are rapidly increasing our cardholder numbers. Our aim is for all of our customers to hold at least one credit card. We are improving very well in that respect. Of course, communication with the market is important. Our marketing department is transferring these developments to the market. We are on TV, in newspapers, on billboards, everywhere.
In 2004 and 2005, we invested in introducing new products. In 2006, we will be improving sales among our points of distribution. But this year we will be focusing mainly on electronic banking. We are heading quickly towards internet banking and SMS banking. They will be an excellent backup to what we have done over the last three years.
We have also opened branches in the last couple of years. And we will open more this year and in the years to come. We will reach more people and be present in many areas in which we are not for the time being. For the coming two years our objective is growth. We have built a very important infrastructure as far as products, services and technology are concerned. Now we want to grow. In the coming five years, as well, our plan is growth in terms of profits and numbers.
Electronic banking has been around for some time in Lebanon. But electronic banking, call centers and even credit cards require very significant client education. Take credit cards for example. We are trying to educate our clients first of all to use the credit card. Then we are trying to educate them to use them at points of sale and not only at ATM machines, because the cards are mainly used at ATMs in Lebanon. We are also trying to get clients to use the call center and e-banking. This needs client education and persistence from the bank. Of course we have offers and incentives for the clients to do so.
We were one of the leaders in introducing reward, loyalty or points systems for credit card users. This year we will be renovating our system completely and introducing, maybe within the coming two months, something to encourage clients to use the card at the point of sale. They will get points, rewards, and cash rebates if they use it at points of sale.

4Anthony Usher,
Head of Consumer Banking, Standard Chartered
E You are known as an emerging markets bank with a strong presence in Asia. What is the bank’s strategy for the Middle East in general, and Lebanon in particular?
As far as the strategy in the Middle East is concerned, it’s pretty obvious that with rising, and likely continuing high energy prices, that the Middle East is going to continue to be a focus of attention – especially, right now as far as Standard Chartered is concerned, in the UAE and Bahrain. Qatar is a big focus. We see that probably as an emerging opportunity at the moment. The UAE is a continuing opportunity – has been for some years, and will continue to be like that. As far as this part of the world is concerned, there’s a sort of spillover effect especially in Jordan – we’re seeing huge growth there. And there’s some spillover effect in Lebanon too. But of course that is muted by the political situation. Actually right now there’s quite a boom in the real estate market in Lebanon. That bodes well for the future. So I think that in general the bank would say that we’re very optimistic about the Middle East. Oman is another area that is developing for the bank – and we’re looking at other places within in the region to expand our reach. But right now our focus is on making the most of the franchises we have in the Middle East – Lebanon, Jordan, UAE, Bahrain, Qatar, and developing in Oman. We’re really piggybacking on the energy boom. It makes sense to be in there, both on the consumer banking side as well as the wholesale banking side. There are clearly opportunities in both areas, pretty much across the region, virtually wherever you look.
Our strongest profit earner or revenue generator right now is the UAE. The bank’s been there for 50 years plus. Bahrain is going well. Jordan is a bit of a latecomer but it’s generating very good revenue, so probably the growth is highest in Jordan on a percentage basis. But obviously compared to the UAE, gross numbers are much much higher in the UAE. We’re really trying to make the most out of that franchise, meanwhile trying to develop the lesser franchises like Bahrain and Qatar. Qatar is coming back. And now with the LNG prices being so high as well, it clearly makes sense to make the most of that. We have a fairly strong franchise there, too. We’ve been there for multiple decades. And so we’re doing our best to make the most of that on the consumer as well as wholesale sides.
With respect to Lebanon, the franchise in Lebanon has only been here for roughly five years. It’s a consumer banking franchise, predominantly, and that’s been our strategic position from day one. Lebanon’s doing well on the real estate side. There’s a lot of direct investment coming in from non-resident Lebanese as well as Gulf Arabs and that’s really what’s driving the economy right now. And obviously we’re benefiting from that. The consumer banking side in Lebanon has done extremely well over the past two years. In percentage terms again it’s very small if you compare it to the bigger markets. And that’s our challenge right now – to get a place on the table as against the bigger markets so that we can get listened to as well.
We are growing very fast. We have an excellent franchise here with a superb team, good branches, super service, and good products. There’s really very little excuse for us not to do well going forward.
Our emphasis from last year was on building the asset side, the consumer lending. We’ve been very, very aggressive in credit cards, personal loans, and auto loans. We’re going to continue that focus but that will become business as usual.
Now we’re moving much more onto the wealth management side. I think that’s where you’ll see the bulk of our enhancements coming along in the future. We’re introducing a number of innovative products on the investment services side. We have now our own dedicated sales team who work on nothing but building up wealth management clients. We’re developing our high net worth service. That’s coming along very well, too. That’s focused towards wealthier local clients as well as non-resident Lebanese. So I think you’ll see that’s the emphasis, so that we end up with a matched revenue stream from both areas, because it is a bit unbalanced at the moment towards the asset side.
The general target market that we’re looking for is sort of middle market and above. That’s not particularly selective, because we can cater to virtually everyone.
The global decision was taken to look at consumer banking in Lebanon because it’s a more diversified risk. At the time, and I daresay even now, the decision was made that given the amount of capital we’re devoting to Lebanon, it’s better placed in the consumer market than in the wholesale.
Middle to long-term our vision would be to be the biggest foreign bank in Lebanon. We’re never going to be the largest bank in Lebanon but we certainly want to give the local banks a run for their money.

4Walid Raphael,
Deputy General Manager, Banque Libano-Francaise

E The bank has a strong Syrian portfolio both in terms of clients and board members. How will this affect your proposed move into Syria and how will it affect the bank’s positioning in the Syrian market?
Banque Libano-Francaise has historically been very active in the Syrian market. Several shareholders are of Syrian origin and are also board members. The bank was active in the Syrian market before the bank was Libano-Francaise, when it used to be Compagnie Algerienne de Credit et de Banque. We had a base in Syria and since then we have had very strong ties with the business community in Syria. We have since increased our portfolio of clients in this region.
We are seeing very strong growth and development in the Syrian market. Large investments are being made in industry and businesses. There is, however, a potential risk that the economy will suffer fron an economic embargo.
We’ve been looking at establishing operations in Syria. We had some constraints with French majority shareholders, who had different views about the region. But we have since made a first step with the acquisition of Banque SBA, which is very active in Syria and has an office in Syria’s free zone, and we are currently working on a license to operate in Syria. We are currently in the application process, the duration of which will depend on the Syrian authorities.
In Syria, we plan to continue our commercial and corporate banking activities but also to develop the retail business, and also to some extent introduce private banking and insurance products. Retail will take time to build. If you look at how other banks have developed in Syria, they have been very fast at developing a network and increasing the level of deposits, but on the retail side it takes time to adapt to the market and structure the right products for it. On the commercial banking side, there is huge demand. So our clients are expecting us to be there as soon as possible.
It is clear today that Lebanese banks need to expand abroad; the market is too small for them, and it is true that the opportunities for them are in countries that are not yet covered by large international banks. In these markets there are very few institutions, and business is based on direct personal relationships. You really need to know the people and how the system works. There is a lack of transparency. People are afraid to show their numbers. You have very few competent auditors. It works on trust, and an understanding of business in the region. Of course, Syria is a risky country. They only recently opened the market. For several years, the market was run completely by the public sector. So it’s quite rusty. The regulations should evolve. You still have a lot of restrictions. It’s not easy to make profitable investments.
The challenge, also, is human resources. It is very difficult to find people who are trained to the standards that we are used to here in Lebanon. For the moment, skilled executives are dispatched from Lebanon.
We are looking at some other countries. But it’s too early to say. Right now we have finalized the acquisition of the Banque SBA in Paris, with a subsidiary in Geneva, which is a very important acquisition. It’s a bank with around Euro 66 million of equity and around Euro 600 million in assets. We want to develop this bank as a platform for international business, not only for the Lebanese and Syrian diaspora in Europe, but also those in North Africa. Private banking will get a boost with business in Geneva.
The Lebanese market has experienced a lot in the last year. We are looking forward to developments on structural reforms.
4Dr. Marwan Barakat
Head of Research Bank Audi SAL – Audi Saradar Group

E What are the banking areas Audi Saradar is addressing in 2006? What are the plans for revenue diversification,
geographical expansion, and product and activity development? Which areas of banking appear most promising?
As a result of exceptional growth performances and a strong earning power, Bank Audi now ranks among the first 25 Arab banking groups, according to the most important criteria such as assets, deposits, shareholder equity and net profits. The bank was able to realize over the 2001-2005 period a yearly average growth in assets of 25.9%, which corresponds to three times the average of the sector, and an average growth in net earnings of 32.0%, equivalent to 2.5 times the average of the sector. Based on these performances, the bank has consolidated its universal banking profile, covering the whole spectrum of banking services, i.e commercial banking, retail banking, private banking and investment banking. Non-interest income now accounts for 43% of net financial income, evidence of successful diversification by business lines over the past few years.
Following this successful diversification of its business lines, the bank is now looking at regional diversification by market of its presence. Total assets actually represent 52% of Lebanon’s GDP, giving to the bank a regional dimension that lies at the basis of its cross-border expansion strategy. Out of $15.6 billion of total footings, the Bank has today 77% in Lebanon and 23% abroad. It is targeting, in the medium term, balanced activity between Lebanon and its affiliates abroad. The new strategy can be summarized by the strengthening of the bank’s domestic franchise, the reinforcement of its immunity against domestic conditions and the enhancement of cross border activity in high value added markets.
It is within this context that the regional expansion policy has gained ground recently. The bank has formulated a regional expansion strategy for the Middle East and North Africa. Against that backdrop, the expansion of Bank Audi within the targeted regions is evolving rapidly. Established in July 2004, the bank’s Jordan network now consists of eight operating branches out of ten licensed branches, dedicated mainly to retail banking and related commercial banking activities. Activity in Jordan has actually taken off nicely, allowing the Group to build assets of above $300 million in 18 months of activity, which ensures the bank a privileged position in this market. The 2005 performance ensured a break even in net earnings, prior to the preset target, with a strong growth in bottom line expected for 2006.
Activity in Syria took off last September with very encouraging first results, exceeding $100 million in assets in less than a half-year period. Bank Audi (Syria) was established in September 2005, with a capital of $47 million. The bank in Syria is 47% owned by Bank Audi SAL – Audi Saradar Group, after an initial public offering for 25% of the bank’s capital that was significantly oversubscribed (about ten times). Bank Audi (Syria) has a targeted network of 20 operating branches, covering the majority of Syrian territories, mainly dedicated to commercial, retail and corporate banking activities.
In addition, the Group just won a public offer on an Egyptian bank, the Cairo Far East Bank, which ensures a good platform from which to launch its activities in Egypt – a market it considers very promising. Bank Audi’s action plan in Egypt mainly hinges on the development of extensive retail activities based on its acquired expertise in that field with the aim of turning it into the main activity of the new entity. In parallel, Bank Audi is looking to enhance the existing businesses of the acquired bank at the level of commercial, corporate and correspondent banking activities.
The bank also obtained in 2005 a license to operate in Iraq. In order to consolidate its presence in the Levant, the Bank considers Iraq to be a market with very high potential, notwithstanding the uncertainties that continue to characterize its overall environment. Despite the persisting volatility in political and security conditions, the bank believes that the probability of normalization in Iraq is higher than the opposite. As such, it cannot neglect a huge potential like the one currently prevailing in such a neighboring country. Bank Audi is actually targeting the launch of activities in Iraq in 2006 in the North of the country, the Kurdistan region, as a first step. The region offers an interesting and secure infrastructure and is currently witnessing booming economic activity.
The prospect for new regional markets with high potential is now in progress, with plausible perspectives in Algeria and Sudan. The expansion of the Bank to these countries is a key prerequisite for its regional positioning, with the aim of firmly integrating, within a five-year horizon, the restricted Group of large regional banks.

4Roger Dagher
Manager­–Financial Control, Bank of Beirut

E Bank of Beirut made significant profits in 2005. How was the bank able to achieve this and what are its strategic aims for the next five years? Will there be any expansion and if so will it be domestic or regional or both? How has not being a family-owned bank contributed to the success of Bank of Beirut?

Bank of Beirut SAL was able, in 2005, to achieve a net profit of $35 million (post dividends). This high profitability was attained due to efficient management of interest rate margins, despite the high pressure resulting from the rise in financing costs in both Lebanese and international markets; increased net commissions, primarily derived from trade finance activities, credit card business and other banking services, in compliance with the bank’s strategy of nourishing its revenues from this source in order to diversify its income and moderate its interest rate risk; cost control and efficiency where Bank of Beirut was able to decrease its cost-to-income ratio despite the growth in assets and number of employees; and finally, the outstanding increase in the profitability of the Bank’s international arms, namely the wholly owned subsidiary in London (Bank of Beirut (UK) Ltd) and the branch in Cyprus, both backed by the three representative offices in Dubai, Lagos and Baghdad.
Bank of Beirut’s strategic aim for the next five years is to strengthen its competitive position by expanding its presence in Lebanon whether through internal growth or selected acquisitions which ultimately would result in further developing consumer (mid-market and retail) banking business; enlarging the network of delivery channels and providing customers with all types of innovative services and products; expanding regionally in countries with large Lebanese/Arab communities where Bank of Beirut has a competitive advantage; improving the bank’s performance management via increased use of technology; and investing further in human capital by hiring the best talents and continually training our staff.
Bank of Beirut has very clear, short, medium and long-term expansion plans. The key here is to seize the good opportunities that would provide BoB with the highest risk adjusted return on investment and meet its long-term strategic goals. Currently, Bank of Beirut is looking for domestic acquisition opportunities and to incorporate and/or acquire banks in the regions where the Lebanese/Arab diaspora is well in place and benefiting from political stability and adequate law enforcement.
We have been recently granted a license by the Central Bank of Oman to open a branch in the Sultanate. With time, Bank of Beirut intends to open several branches in Oman and to focus on both the commercial and retail banking sectors, as well as become a trade channel between Oman and the UK.
The license for Syria (with Qatar National Bank and Emirates Bank International as partners) is in its final approval stage. Bank of Beirut is also contemplating expansion beyond the MENA region. In this respect, we are planning to enhance the activities of our subsidiary in the UK Bank of Beirut (UK) Ltd, as this has already established a success story and a great deal of room for further growth is envisaged. Most recently, we have acquired the UK private banking arm of a major North American bank.
Finally, as to not being a family-owned bank, this fact has definitely contributed to make Bank of Beirut one of the few banks in Lebanon and in the whole region that have applied the highest level of risk management standards, the internationally recognized corporate governance guidelines and the most accepted transparency principles and practices. Actually, BoB has applied written “Corporate Governance Guidelines” approved by the board of directors. The board itself is composed of two executive members with prominent banking experience, Emirates Bank (Dubai – UAE), two high experienced bankers (both of whom were Chairman and CEOs of banks acquired by BoB) and two very successful businessmen. The number of shareholders is close to 2,000, and the bank listed its shares on the Beirut Stock Exchange starting in 1997.
Additionally, Bank of Beirut has several committees that actually have a notable role in the decision taking process in connection with the investment strategy, risk control and operational efficiency.

On May 17, Lebanon was on top of the world. Literally. A Lebanese flag had been planted at the summit of Mount Everest, the world’s highest point. And what then, according to the Daily Star, did mountaineer Maxim Chaya do?
“He contacted his sponsor, Audi Bank, and thanked them for making his dream come true.”
Call it community outreach, or charity, or Corporate Social Responsibility. Banks’ logos can be seen in the sponsor’s position at athletic contests, concerts and art exhibits, and other cultural events around the country. And they also lend their support (and their brand names) to educational, environmental and development efforts.
Marwan Kheireddine, General Manager of Al Mawarid Bank, rejects the idea that publicity is the primary goal of CSR spending, at least for his bank. “The objective is not really exposure. The objective is community development.”
But Elie Azar of Lebanese Canadian Bank doesn’t see publicity as a bad thing. “When we opened our new branch in Halba,” he says, “we didn’t do an expensive advertising campaign. We gave away 180 boxes of food and provisions to the needy families there. These people were our best publicity.”

No bright lines
Azar does not see a bright line between a bank’s service to the community in its charity spending and its service as a commercial entity. “When we opened our branch in Hermel in 2003,” he says, “we were the first bank in the area, and we gave the people there access to a number of services they needed if there was going to be development, if they were to be able to stay there.” This value notwithstanding, the bank also contributed to a UNDP project bringing clean water to five hundred homes in the province.
This “both-and” approach informs another Lebanese Canadian Bank initiative. At the beginning of May they started to offer a unique loan program, offering loans of up to $5,000 at a 9% interest rate to homeowners in order to install solar water heaters in their homes.
“It’s a win all around for everyone,” says Azar. “The loans are profitable for us, and the customers save much more in heating costs than they pay over the time of the loan. And then you can add in that it saves the environment and reduces the pressure on our electrical and fuel infrastructure.”
LCB has been getting 5-10 applications a day for the loans. “This is the future,” says Azar. “If you look at the other countries in the region, in Israel 80% of the houses are using these heaters – in Greece, it’s 60%.”
In their more traditional CSR spending, Azar says, his bank concentrates on finding “effective projects that will have a positive impact.”

Relying on local knowledge
To identify the projects they wish to fund, banks rely on their local managers’ knowledge of their own communities.
“We work with each branch to discern the needs of each region,” explains Nahla Bou-Diab, assistant general manager of Al Mawarid. “The needs in rural areas are different from major cities. We have a branch in the village of Dmit, in the Shouf mountains. The community there are not well-off – their needs are for assistance in terms of developing a medical center – we helped them with basic necessities, schools, medicine, and so on. In another village in the Shouf area, the community were a bit more affluent, so in that particular area we designed a garden.”
Individual branch managers for Al Mawarid analyze the opportunities in a community and submit recommendations to the central branch. Some ideas come from formal or informal requests by NGOs or other organizations, and others come from the managers themselves. “Our manager in one area knew of a medical center that was crucial to the community – it was a poor area, and people were reliant on it every day. He knew that this center had a number of needs, and proposed to us that we help with them.”
Byblos Bank trusts its managers to decide on much of its educational spending. “In all the regions in Lebanon, our branches have a lot of schools as customers,” says Joumana Chelala, Senior Manager at Byblos Bank. “Our managers each have a budget to use towards educational needs, whether scholarships or something else.”
Banks are eager to get their employees involved. “Social responsibility is not just about contributing money to the community,” says Bou-Diab. “The other part that’s really essential is highlighting that these areas are really important in the eyes of management. One example of that was when we offered to match our employees’ contribution to St. Jude’s Children’s Cancer Care Center. We had 90% participation among our employees.”
“The salary structure in Lebanese companies is not very high,” she adds. “So these employees who contributed are not, financially, very very comfortable.”
The banks’ representatives show the pragmatism of a hardened loan officer in assessing their choices. Khaireddine says that Al Mawarid stopped funding concerts because “they were not doing anything for the community. We financed a few classical concerts in the Shouf, but the people who came, came at night, and didn’t even spend dinner up there. We felt like we were just making the events more profitable for the promoters.”
Chelala came to the opposite conclusion about cultural events, but arrived there by a very similar line of reasoning. Discussing her bank’s support for the Byblos festival, she says, “Before the festival, Byblos was not a destination for Lebanese. But now, even when the festival is not going on, many people from Beirut go up for dinner, or to visit the old souq.”

Focused on tangible outcomes
Perhaps because of their pragmatic approach, banks’ spending tends to be focused on tangible outcomes; medical centers refurbished or trees planted or schools equipped and teachers trained. Buzzwords common among the NGO community, like “civil society” or “dialogue,” don’t come up much.
“The private sector is becoming very active in supporting work in the environment, education, and so forth,” says Gilbert Doumit, who works both in education and in civil society areas. “Lebanon is well ahead of most Arab countries in this. But in more political, civil society, or citizenship-related areas, they are not so eager.”

To identif the projects they wish to fund, banks rely on their local managers’ knowledge of their own communities.

Education is a priority across the board. Kheireddine points to a library and computer training center near Shebaa. “We’ve taught people how to use computers there, and more importantly, we’ve given the young people there, right next to the Shebaa farms, access to the internet. Now they have access to the world.” Azar discusses a new library in Hermel. But it’s Byblos Bank that has taken on perhaps the most ambitious project.

Adopt-a-school
In a partnership with UNICEF, International College, and a large network of NGOs, Byblos Bank launched an “Adopt-a-school” project. The $200,000, three-year project, whose goal is to reduce the drop-out rates at a pair of public schools in Tripoli and Kesrouan, aims at attacking the problem from a number of different angles simultaneously.
There will be physical upgrades to the schools, especially to the bathroom and sanitation facilities. There will be training for teachers and administrators in identifying and helping children with special needs. But possibly the most important factor is literacy classes for the parents of children in danger of dropping out.
With an illiteracy rate as high as 20% in Northern Lebanon, children are “not given the support they need at crucial points in the curriculum,” says Roberto Laurenti, head of the project for UNICEF. “As the curriculum becomes more difficult, illiterate parents are unable to help those children who are already struggling.” As a result, the drop-out rates among 7th and 8th graders in Lebanese public schools are 9% and 11%, respectively, twice as high as at private schools. And once they drop out, they become vulnerable to any number of problems, from child labor to drugs and violence. “It costs much less to invest in keeping these children in school than to pay the social consequences later,” notes Laurenti.

“It costs much less to keep these children in school than to pay the social consequences.”

He emphasizes that all of the resources for the program, from expertise in training to monetary resources, are coming from within the country. “UNICEF is acting as a broker, bringing the people with the monetary resources in contact with the NGOs who can make use of them. We’ve been able to provide an opportunity to narrow the distance between financial and human resources in this country.”
The program differs from much charitable giving, Laurenti says, in that it is focused on dealing with a specific problem through a wide variety of needs, rather than on focusing on physical infrastructure. “We hope to see measurable improvement in the drop-out rate within a year and a half,” he adds.
This focus on a measurable outcome is a major step forward for CSR spending in Lebanon, says Isabelle Naoum, head of PR for Byblos Bank. “It helps us move towards a more formal CSR program, one where we can quantify the results of our action, and better fulfill our responsibility to our shareholders.”

The affinity of Lebanese banks for government Treasury bills and other fixed income securities has always been strong, but the love affair intensified significantly in the early 1990s with the Hariri-inspired Horizon 2000 reconstruction program, which forced the government to resort to domestic and foreign issues of government fixed income securities or bonds to finance the project.

Rebuilding the country and the pound
Back then the country was in tatters. Not only was there an urgent need to rebuild, but the Lebanese pound, which by the fall of 1992 nearly hit LL3,000 to US dollar, also had to be saved. Rafik Hariri was quick to realize that the only way to obtain fast financing was to resort to debt via the issuance of domestic, Lebanese pound denominated Treasury bills. Loans from international banking institutions or supranational organizations such as the World Bank or the IMF would have been too slow to come in, too expensive and insufficient in terms of amount. On the other hand, Treasury bills in local currency, provided they carried a very attractive yield, would be easy to print, issue and place in a large domestic banking sector, which, although under-developed, lacking in significant human resources and strategic guidance, did have sufficient funding that needed optimization.
The banking sector at the time had succeeded in attracting around $6 billion in deposits from expatriate Lebanese but did not have the human resources or managerial quality to employ these new funds efficiently. Banks urgently needed to allocate their funds in such a manner as to boost their stagnating profitability and hence increase their capital base, which at the time was extremely insufficient and well below the international capital adequacy ratio of 8%. By subscribing to high yielding Treasury bills, the banks would not only help finance the government and the reconstruction program, but also buy themselves valuable time for the development of their own banking activities.
The government used the domestic banks to the full and issued significant amounts of Treasury bills, distributing them among the 83 banks from 1992-1996. Although the national debt level was increased significantly and debt service began eating up most of the government’s revenues, the reconstruction program was well under way and would be used as the main marketing tool for the government in its efforts to issue dollar-denominated Eurobonds. The first Lebanese Republic Eurobond of $400 million in 1994 was voted Bond Deal of the Year 1994 by the international bond community and was placed evenly among Lebanese and foreign investors. It would be the first of many to come in subsequent years, although the investor base for this particular instrument became 100% Lebanese (mostly Lebanese banks) as foreign investor enthusiasm waned.

Trading in government securities
Since then the Lebanese banking sector has increased its profitability significantly and boosted its capital adequacy to better cover the risks of the domestic operating environment. Some banks even made it their specialty to trade in government securities, while the sector as a whole started to appear more as a sector of deposit and savings banks rather than a real commercial banking sector.
Until recently, Lebanese banks appeared as financial institutions whose main function is to attract retail deposits and to place such deposits in government Treasury bills and Eurobonds. The diversification of activities, the expansion of typical banking activities such as retail banking, and the diversification of revenues are more recent developments for the Lebanese banking sector, which for a long time relied on the yield of government debt securities to finance and develop traditional commercial banking activities.

For a long time, the lebanese banking sector relied on the yield of government securities

What developed was a tacit understanding between the banks and the government, whereby the government would reward the banking sector with high yields, which would be instrumental in strengthening this vital economic sector, while the banks would use their funding to continuously follow the government in its reconstruction and now debt management efforts, and to support the stabilization of the local currency.
Non-Lebanese investors take part
Non-Lebanese banks and investors also took part in the Lebanese government’s fixed income securities issue drive. Indeed, by the mid 1990s, many Gulf banks and high net worth investors had subscribed to the high yielding Lebanese T-bills and Eurobonds (interest rates on T-bills denominated in LBP had reached 45% by 1995), considering these instruments to be a risk worth taking. The rating of Lebanon for the first time back in 1996 (ratings of B+ by Standard & Poor’s and Ba3 by Moody’s first came out, but were subsequently brought down by four notches to the current level of B-) did not make a difference in terms of yield and certainly did not decrease the appetite of Lebanese and Arab investors. Only Western investors, who are significantly more risk-minded, withdrew, considering Lebanon to be risky over the medium term. For Arab investors, it was a case of being well rewarded for taking on Lebanese risk, while some reciprocation would be reflected by investments in Lebanese real estate and projects.
By the end of the 1990s, more than 35% (35.8% in 1999) of the balance sheet of Lebanese domestic banks was accounted for by government Treasury bills and Eurobonds denominated in both Lebanese pound and foreign currency (mainly in US dollars). At one stage, in the mid 1990s, the proportion of government debt securities to total assets for most banks, including the larger ones, stood well above 50%. The government debt securities to total assets ratio for the banking system has gradually decreased since the mid 1990s, having gone as low as 23.2% in 2003 and 23.6% in 2004, in the aftermath of the Paris II donors’ conference, when interest rates on assets and deposits were decreased significantly by both the government and the banks. By February 2006, the ratio had gone up again to 25.9%, although it remains significantly below the proportions seen in the mid and late 1990s.
Since the Paris II conference, the Lebanese government has changed its attitude toward its borrowing and debt security issues policy. Pressured by international donors and relieved by cheap financing (around $4 billion in subsidized and soft loans), the government and the central bank had to improve the overall liquidity and foreign currency reserves by encouraging local banks to reduce their exposure to government debt securities and by requiring that a certain proportion of deposits (15% of foreign currency deposits for instance) be allocated in regulatory cash reserves at the central bank. By the beginning of 2006, cash reserves and deposits at the Banque du Liban (BDL) accounted for almost 30% of total consolidated assets for the banking sector. Such cash reserves coupled with the stock of government debt securities make up for almost 60% of total consolidated assets, leaving little room for local banks to lend to the private sector. Loans to the private sector accounted for around 23% of total consolidated assets by the end of February 2006.

Government exposure remains high
Coverage of almost 30% of customer deposits remains very high by international standards and the balance sheet of Lebanese banks appears to be reassuringly liquid. However, exposure to the lowly rated Lebanese government remains extremely high. If we add reserves at the central bank to government debt securities, then we can only realize that the banks’ exposure to the government dangerously approaches 60% of total consolidated assets. Furthermore, given the very difficult operating environment in Lebanon that makes lending to the private sector very onerous, any excess liquidity the banks might get is automatically invested or placed in cash reserves at the central bank or in Lebanese Treasury bills or other bonds issued by the government.
Today, the exposure to the government or cash reserves, deposits at the BDL and government debt securities account for around 8.5 times the banking sector’s consolidated shareholders’ equity. This means that any significant devaluation of the Lebanese pound or the US dollar, and/or a drop in the value or yield of government debt securities as a result of a rating downgrade (which remains a constant possibly) by 10% or more, would wipe out the banking sector’s equity base. What is also worth mentioning is that the significant maturity mismatch between funds and assets (in other words deposits carrying an average maturity of around 1.5 months and assets such as Treasury bills carrying a maturity of more than 15 months) makes Lebanese banks very vulnerable to any potential hike in interest rates. Indeed, if Lebanon is downgraded as a result of a failure to carry out economic reforms and privatization, then interest rates on deposits would have to be raised at a time when returns from assets are not yet available. This would erode the banks’ shareholders’ equity and reserves, and affect profitability.

Doomed from the start?
Hariri’s fiscal brainchild would indeed have been perfect were it to be accompanied by economic reforms, privatization, economic diversification, long term strategies, plans to eradicate corruption, racketeering, and so on. In their absence, the state is suffering from over-indebtedness; there is little government revenue and economic diversification and the non-bank private sector is suffocated by insufficient economic growth and inefficient and corrupt public utilities. The banks have had to continue operating in a constraining operating environment and are still heavily exposed to a sovereign which carries one of the lowest ratings on the planet. They also suffer from low revenue and asset diversification, are exposed to interest rate risk, and have low economic capital.

Perhaps it would have been more judicious to privatize public utilities immediately through Built Operating Transfer (BOT) and/or concessions (a longer term form of privatization), or even outright sale rather than borrow significant amounts to rehabilitate a still inefficient infrastructure. Privatization, even on the cheap, would have modernized the country at no expense, left debt levels very low, brought in revenues for the government (in the form of taxation and concession/BOT fees), and created jobs, while simultaneously diversifying the economy. But again, maybe we all lost the plot and confused the end of the shelling with the end of the civil war back in 1990, not realizing during the last sixteen years that the dice were loaded and that our reconstruction funding plans were doomed from the start.

The striking thing about the latest consolidated balance sheet of the Lebanese banking sector is the lack of change in its structure. After a period of ten to twelve years at least, assets are still split between cash reserves and deposits at the Banque du Liban (BDL), Treasury bills and other government debt securities, and loans to the private sector. As at the end of 2005, government securities accounted for 25.2% of total consolidated assets, while cash reserves and BDL deposits accounted for 29.2% and loans to the private sector for 23.1%. Foreign assets, which principally include inter-bank deposits with banks abroad accounted for 18.8% and fixed assets for 3.3%.

Funding, as has always been the case for the last 15 years, came principally from customer deposits, which accounted for 72% of total liabilities or interest-bearing funding. Total customers’ deposits, excluding deposits from non-residents, amounted to almost $48 billion by the end of 2005 and to $48.2 billion by the end of February 2006. The customer deposits figure has not increased significantly in the last three to four years, reflecting a sort of optimization of the consolidated balance sheet. Indeed, banks have slowed down their race to attract deposits by offering high interest rates, as placement of funds opportunities are scarce in a very difficult and deteriorating domestic operating environment. Moreover, the Paris II donors’ conference in November 2002 forced interest rates on both assets and liabilities to be decreased. Today, many of Lebanon’s larger banks are offering interest rates on customer deposits which are almost on par with what’s being offered by large international banks in AAA-rated countries. This is mainly due to the gradual rise in US dollar interest rates since 2002, which have today reached 4.75%.

Dollar accounts lose edge
When Lebanese banks offered 4.75% on US dollar savings accounts, the US dollar Libor (London inter-bank offer rate) was slightly below 4% at around 3.5%-3.75%. When the US Federal Reserve raised the US dollar Libor rate to 4.75%, Lebanese banks did not react and kept their own deposit rates relatively unchanged plus or minus a quarter of a percentage point. The compulsory tax on interest rates of 5%, which is imposed by the Lebanese government on both residents and non-resident depositors, brings any rate offered on deposits with Lebanese domiciled banks down to the same level as international rates.
Given the above considerations, a dangerous conclusion for the banks and the country can be drawn: why would anybody keep his savings in a bank domiciled in a B- rated and volatile country, and pay taxes on his interest receipts, when he or she could easily place his/her savings in an international AAA rated bank domiciled in a AAA rated country, get world class service and the same level of interest rates, and not pay taxes? Were a critical number of depositors to realize such a state of affairs, it would be highly likely that the liquidity of some banks may be tested again.

Relying on customer deposits
Lebanese banks seldom diversify their funding and continue to rely on customer deposits, which are nevertheless recurrent in nature despite having on paper an average maturity of 1.5 months. The maturity mismatch that characterizes the Lebanese banking sector does not appear to be a problem, as banks succeed in maintaining and even increasing their deposit base year in and year out. The only problem is that if the country is downgraded or there is a major external blow, such as last year’s assassination of former Prime Minister Rafik Hariri, then interest rates on both assets and liabilities may go up. Given the maturity mismatch, the higher rates on deposits, which have a much shorter maturity than assets, would then have to be implemented immediately, while valuable time would pass before the higher rates on longer assets are received. The ultimate price for Lebanese banks would be to see their profitability affected in the short term, and to witness depletion in equity and provisions, which would be difficult to compensate at a later stage if the interest rate hike is significant.
Straight, plain vanilla bonds accounted for 0.08% of total assets and amounted at year end 2005 to a measly $58.7 million. This is surprising, given the previous success banks had in the international capital markets when they last issued large size bonds back in the late 1990s. It is worth noting that the fact that the Lebanese government is still a frequent issuer of Eurobonds should make the banks equally attractive amongst local and international investors when issuing bonds. Issues of medium to long-term bonds would improve the maturity mismatch of most banks, while this other form of funding could be placed in new, but badly needed projects and/or products.

Medium and small banks clearly lack sufficient capitalization. They have been warned.

The Lebanese banking sector’s equity base has increased by a little bit more than 10% from the end of 2004 to the end of 2005, reaching a consolidated figure of almost $4.3 billion. The same figure has increased by almost 7% in just two months since the end of 2005 to reach $4.6 billion at the end of February 2006. The reason for this rise in equity is partly due to a frenzy of preferred share issues and to capital increases, which were mostly subscribed to by wealthy Gulf investors. Shareholders’ equity also rose because of better than expected profitability for the larger banks which were able to allow for an organic growth of their equity.

Insufficient capitalization
The consolidated equity figure for the banking sector is still regarded as barely sufficient, as reflected by an equity/assets ratio for the whole sector of 6%. With the implementation of Basel II requirements starting in 2008, the domestic banks’ current economic and regulatory capital would not be enough, as Basel II promises to hike risk weighting on assets significantly. For the moment, risk weightings are excessively generous and do not reflect the reality of credit risk in a volatile country such as Lebanon. It is also worth mentioning that from the consolidated figure of $4.6 billion of February 2006, at least $1 billion was accounted for by one bank, BLOM, which is the largest bank in the country. That particular statistic should be considered alarming for the medium and small banks, which clearly lack sufficient capitalization. They have been warned.

The hey days of the mid to late 1990s in terms of bank profitability are now over for most Lebanese banks. During that period, local banks were able to create significant interest rate margins between deposits and other funding on the liability side, and loans and government debt securities on the asset side. At that time, yields on government debt securities, whether Eurobonds or Treasury bills, were very high and well exceeded the 10% mark for both Lebanese pound and US dollar denominated fixed income securities, while deposits carried average interest rates (albeit, higher than current levels).
Profitability at Lebanese banks has been on a declining trend for some time, as some banks have slowed down their growth, while others find it extremely difficult to lend to viable and creditworthy companies, individuals or projects, given the deteriorating general operating environment. But the main reason for a depleted profitability is the enforced provisioning by the BDL, which requires a certain percentage of customer deposits to be kept in the form of cash reserves and deposits at the BDL, mostly at an interest rate of 0%.

Interest income still accounts for around
80-90% of total banking income

Since Paris II, when interest rates were brought down to more normal levels, banks have been left cogitating about ways to improve their profitability. Additional provisioning requirements to cover for an increasing level of non-performing loans (as the operating environment is still depressed), subdued loan growth and limited options for low-risk profit-generating investments, and escalating costs for IT investments, the expansion of the branch network, product development and foreign acquisitions, are all factors that have contributed to a slowdown in growth, in addition to the enforced over-liquidity of the balance sheet.
Profitability remains at risk, as Lebanese pound operations (mainly Treasury bills denominated in LBP) are in fact subsidizing US dollar operations. If the Lebanese pound devaluates (the risk still exists), the profitability of Lebanese banks could be wiped out. Moreover, interest income still accounts for around 80%-90% of total banking income and the banks are still at a level where earning diversification is still “under study.” Some banks, particularly the larger ones, have acted more swiftly in the issue of earning diversification by establishing operations abroad and expanding retail activities. This explains the rise in profitability in 2005 for most of the larger banks.

Large banks increase profits
For example, Bank Audi, or the Audi-Saradar group as it is currently named, witnessed an increase in net profits of 48% by year end 2005 to around $106 million. This was due mainly to a rise in commission income and to better profits on financial or treasury operations. Bank Audi’s foreign investments are clearly starting to pay off, and the bank’s recent merger with Egyptian investment banking group, EFG Hermes, bodes well for the future. However, a return on assets (net income divided by total assets) of less than 1% (0.9% in Audi’s case) still shows a very average profitability. Truly profitable banks worldwide usually register ROAs of well above 1% and more in the 2% waters.
Byblos Bank’s performance was similar to Audi’s, in the sense that it too had an ROA of 0.9% at year end 2005. Profit growth was less significant, as net profits grew by 28.5% to $69.3 million. Profits would have been higher were it not for a 157% rise in allocations to loan loss provisions. But the bank was able to more or less compensate with more commission income and financial and treasury operations.
BLOM Bank’s profitability rose significantly by 72.2% for the year ending March 2006, to $44.2 million. However, this profitability could have been higher given the size of Lebanon’s largest bank’s balance sheet and equity base. BLOM is known for its conservative and prudent approach to lending, but nevertheless holds the most important franchise in the country.
On an annualized basis, Banque Libano-Francaise shows an ROA of 0.5%, for an annualized net profit for 2005 of $18.9 million. This bank is still considered to be in a transition phase, as its previous French 51% shareholder, Credit Agricole, sold its stake to regional investors a little bit more than a year ago. The bank is currently going through some changes in management, in culture, and in business philosophy, and significant provisioning is also gradually taking place. BLF should be expected in the medium-term to become increasingly more profitable as its new strategy falls completely into place.
Bank of Beirut, one of the best-managed banks, saw a profit growth slightly below the 10% mark. Its ROA is similar to its peer group at around 0.6%. Net interest income and non-interest income were slightly reduced in 2005, and the rise in net profitability to $28.3 million (unaudited accounts) was mainly due to less allocations to loan loss provisions. Given these figures, one can only feel that the bank is currently optimizing its balance sheet.
The only audited accounts for 2006 came from Crédit Libanais, a traditionally well-managed institution, with state of the art systems, policies and procedures. This bank’s profitability also improved in 2006 by 22% to $23.3 million, which is a step closer to its profitability of $25 million+ during the peak period of 1999-2000. However, ROA remains lower than a standard 1% at 0.7%, reflecting a further need to diversify earnings and invest in some form of product and geographical expansion.
Other high growth banks, such as Intercontinental Bank of Lebanon (IBL) and Lebanese Canadian Bank have witnessed significant growth in profitability in the last few years, which was commensurate with their impressive asset and deposit growth. Although IBL did not publish end of year accounts, its June 2005 figures show an ROA of 1.08% and a 65% net profit growth on an annualized basis. Lebanese Canadian, which had grown substantially in the last five years, is showing signs of profit slow down, as the net income increase dropped to 16.8% in 2005 compared to 65% in 2004.

Profitability depends on stability
As seen above, Lebanese bank profitability would highly depend on the stability of the operating environment, which itself depends on the political situation and the ability of the government to implement an efficient economic recovery and debt repayment plan. Given the socio-political mess of the last few months and the desperate lack of light at the end of a very long tunnel, banks are strongly advised to look elsewhere for profitability.