The Blom banking group also for 2004 occupied the leading position in important categories for Lebanese banking, including ranking first in assets, profits, and shareholder equity. BlomInvest is the investment banking and private banking arm of the group. Executive talked to general manager, Fadi Osseiran, about the performance of Lebanese and regional markets, the general outlook, and the group’s development perspectives.
How do you judge the performance of Lebanon’s financial markets in the recent past?
Financial markets in Lebanon are developing quite ok, especially on the fixed income side. I am looking now from the issuer point of view. On the dollar side, the market for sovereign paper has developed quite well for primary issues, secondary market, and market makers. The Lebanese Pound side has not been developed properly and I think there is room for improvement.
On the corporate side, banks have issued CDs and eurobonds, but less happened from corporations, apart from Ciments Libanaise. I think there is also room to go forward in this area. This is not an easy thing, however, because you need investment banks to play a role.
Why could that pose a difficulty?
Because investment banks are mostly part of commercial banks, those banks have no incentives to help corporations issue bonds when they will receive lending directly from the banks. In this sense, I believe that there is a role to play for a financial company that is not related to banks. In fact, banks would love to participate in corporate issues, if a specialized institution came to the market and arrange for this. For us as bankers, it is much more difficult to do this, because we are competing with our commercial bank.
Is there muscle in Lebanon’s capital markets?
On the equity side, there is major room of improvement because the privatization process has not been realized. If the government would privatize or, apart from privatization, sell the stake it owns in private companies, like Intra, the whole equity market would also develop.
The most important thing is for corporations to come to the market. The difference between corporations and banks in that respect is that corporations do not have the exposure of banks, especially to international or Arab investors, and that they are not regulated in the way banks are regulated. That makes them less inclined to issue and therefore to be bought as equity. They also need size, because you can’t increase equity if you have a small size. I can see that many corporations need increase of capital. I think the only choice for them is to go to the capital markets.
Are these the only reasons why the equity market is developed less well than the fixed income market?
Seen from the regulatory angle, the bond market has developed more because it is an interbank market. For equity you have to go to the stock exchange. The lack of financial authority and regulations did not help develop the market. By establishing a special authority for it, the equity market will develop much more.
A third lacking is on the demand side, investors. Our investors, at least the Lebanese ones, are more inclined towards a fixed-income instrument. They are deposit takers and don’t want exposure to fluctuation in prices or losses. On the demand side you need also major investors that are the pension funds. Pension funds do not exist in Lebanon and thus a player that is supposed to play a major role in developing the market on the demand side, does not exist.
What are our chances to improve our market cap significantly, like other Arab stock markets have increased theirs?
The channeling of funds has been a feature of the Lebanese economy but because there is no alternative, the most liquid of investments are bank deposits. I am not saying that there is no way of investing in other instruments. But they have to exist.
There is a major tool if you offer investors alternatives whether in real estate, or real estate funds or stocks or corporate bonds or whatever instruments you can create. If you have funds flowing into the stock market, this will not lower your deposits. You can have both and the more instruments you have, the bigger the market will be.
When talking about funds that have been flowing into the stock market and into Solidere lately, one important point to be mentioned is that these were not only Arab funds. Even foreign funds, emerging market funds, came here which are looking at the Lebanese market as part of the Arab markets and want to invest into this new developing market. If reform were to happen in Lebanon, the market would increase much more but that should be concomitant to introducing new instruments.
What is life like for an investment banker these days with such diverse developments all around, between the GCC and Lebanon? Are times very difficult, are they exciting, or perhaps dry and boring?
It’s never dry, it’s never boring. Exciting is the proper word. We are torn between two issues. One is to look after our customers, the second is to promote Lebanon not only because of patriotic reasons but also we feel value there. When I see how the markets are prospering in the region and what opportunities exist, I have to tell my customers about these opportunities but I also am keen on bringing enough customers to Lebanon and see the value of the place.
What are the focal activities of BlomInvest?
We do mostly private banking, and we do investment banking. We do private banking since my horizon is the whole world and my customer is my priority. He can invest in Lebanon, in the Arab world, in the US, he can invest in the bond market, the equity market, in a structured product, in deposits, in foreign currency – and there is always a market that will satisfy my client.
In investment banking, the issuer is my priority and my role is confined to Lebanon. If the government is issuing, I am there and in fact, we have been there. If the corporate market is issuing, I am there whether in the bond market or in equity. But if they don’t issue because of regulatory or whatever reason, I cannot do something that is not there.
So you are saying that even as one of the largest players in the financial market and the BSE, you cannot create this market?
Let me put it more specifically. If the government doesn’t want to privatize, I cannot force it to privatize. Privatization will lead the market. Suppose the government would privatize, we would be there and at the forefront of the privatization process in helping whether in investment banking or private banking. If for whatever political reasons there is no privatization, I cannot do anything.
Some people in private banking expressed that they see investment banking currently as the more difficult activity in Lebanon of the two. Would you share that perspective?
I think it has been all the time more difficult. Had you asked me ten years ago, “why you don’t do investment banking?”, my answer was just the way I am answering today. I didn’t think at that point in time that the time had come for the authorities to understand investment banking. However, I feel that now we are really approaching the era of investment banking, and very, very fast. Before, you see, we haven’t seen the need and it was leisure to do investment banking. Now, it is a necessity.
Where do you see the coming period lead us, and what does that mean for investment banking?
The government has to privatize and corporations have to increase their capital. And the economy needs restructuring both on the government level and on the corporate level. All the three processes need investment banking. I believe that the only way to move forward is to do some kind of restructuring – and you cannot do restructuring without investment.
Whether this investment bank is to be local or foreign, is a different story. As a local investment bank, we’ll be there and we will be competing. We have all the capabilities of competing and doing a good job.
I don’t know how things could turn but I can see that we are at a crossroads and this is why the need for investment banking is now more pressing than 10 years ago. Little by little, investment banks will constitute another pillar of the economy like commercial banks have been, are still today and will continue to be a major pillar of the economy. Financial markets will help Lebanon also to receive a lot of money that will not go straight into deposits and cost us but will go into foreign direct investment, FDI.
Turning to Blom Bank, which just issued $100 million in a preferred shares issue. Could you tell us the rationale behind this step?
The bank is growing and this growth in assets is bigger than the growth in capital that is being retained. The increase in capital is warranted. The choice is how to increase your capital. We think that increasing our capital in dollar is important because our loan portfolio, our exposure is in dollar.
Regulation will tell me that if I have to increase my capital through issuing ordinary shares, I have to increase it in Lebanese Pounds. The rationale for issuing preferred shares is that the law has allowed banks to increase capital in preferred shares but keep them in the currency that they are issuing in.
Your GDRs performed nicely over the past twelve months. Are there any considerations about trading the bank with its regular shares fully on the stock market?
Nothing prevents it. Historically, when the GDRs were listed, it was the only way to list our shares. We issued GDRs to be able to be traded by foreigners, started trading abroad and brought them back to Lebanon. The question, why not trading all the issues – we did not think about it but nothing prevents us from thinking about it. There is no taboo. We will look into it and see what the benefits of the shareholders would be. That is basically our concern.
Do you have any concerns that regulations or management of Lebanon’s stock market would be insufficient?
We have reservations in that we believe the financial market needs to be regulated much more but that has nothing to do with the day-to-day management of the exchange where I think the BSE has been doing an excellent job. Now, they are moving to extended hours of trading. The BSE is also looking seriously at online trading from sites like the banks, and in very latest developments will probably be starting the trading of options. It is in the discussion.
The opening of the regional Dubai International Financial Exchange has been scheduled for the end of September. Does Blom have any inclinations towards DIFX?
Before they started the process of opening they paid us a visit to see if we want to join either as issuer or as broker. We looked at it and are still looking at it and we’d like to see how it will develop before we make any decision. There are a lot of hurdles, in terms of currencies, settlement and trading, but if it works, it will be wonderful and we definitely should help them. The times are definitely not boring. They are the antithesis of boring.
Any further BLOM intentions? There were stories about more regional expansion?
That’s in the plan. We have been in Syria and in Jordan and are already in the Gulf.
There was some talk about Egypt
Could be. I am not in a position to say, but by the time this story is out, something could happen. We will see.
As private banker, would you say that investing in Blom today is not a bad idea?
It was never a bad idea. Even as Blom shareholders have seen the prices drop during some period, dividends were more than enough to help them carry the stock. But in the long run, it was always a mine of gold and I think it will remain that way.