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. 

With women representing less than 30% of the Lebanese labor force (despite over 50% having a university degree), one could be excused for assuming that the traditionally male dominated world of finance would be the last bastion to fall under the onslaught of career-minded females. Yet over the years more and more competent women are forcing a change in the traditional mindset.

“It’s harder for women in this business, especially in the Arab world, where there is a tendency to take women less seriously,” Roula Habis, a funds and products desk manager at Financial Funds Advisors, says. “It’s a man’s world so you have to be tough to be in it, but women can compete and they have proven themselves to be good managers. The industry is changing, notably because you’ve had several successful women who have proven themselves. This has helped change mentalities.”

Despite being one of only four female brokers on the floor of the Beirut Stock Exchange (BSE), Lara Dib says she has rarely experienced any discrimination.

“I haven’t had to face many problems as a woman,” the young mother says. “Occasionally you will find an elderly client who prefers to work with men, but these are rare. Your regular investor is aware and highly educated – he will be able to gauge whether you are competent or not. Furthermore I work with a lot of banks and companies, where you also have women dealers.”

Changing lifestyles as a result of a shift in mentalities has further contributed to the promotion of women in the financial world.

A growing number of working women are choosing to have their children in their mid to late thirties, giving them more time to establish a career.

“The culture is not what it used to be,” Serene Mawlawi, managing partner and founder of ProFinance, notes. “For those who are married, there is now a greater tendency to think that you don’t know what will happen further down the line, so a woman needs to get an education and a job. Parents are also giving their daughters more leeway. For instance more are now willing to let their single daughters move to Dubai if a good job opportunity presents itself.”

Yet if mentalities have changed in Lebanon, the rest of the Middle East has not followed suit as rapidly, making for the occasional challenge posed when negotiating with foreign clients.

“It can get a little tricky when you are doing business with clients from the Gulf, although most of these countries, such as Dubai, have become much more open over the years,” says Mawlawi. “It is generally just with the Kuwaitis and especially the Saudis that I may need to be a little bit more aggressive. The Saudi bureaucracy can also be difficult, in terms of granting visas for instance. I wouldn’t send any of my female employees alone to Saudi Arabia.”

Women over Men

Despite the occasional challenge posed when dealing with clients from the Gulf, Mawlawi, whose company has four women and one man, still prefers to hire women. She finds they tend to be more detail-oriented and focused.

Dib concurs. Her company, Credit Commercial et Foncier (CCF), also has a majority of women and was transformed from a real estate company to a financial institution by her sister Carole Dib, the assistant general manager.

“It hasn’t been a deliberate recruitment policy, but we find that women tend to more hard-working and can put up with more,” the broker, who completed her MBA while working full time, notes.

Women who try to rely too heavily on other assets than their brain cells however, are unlikely to complete the race to the top.

“Mentalities have changed – connections and beauty are not enough,” Dib comments. “If you are not competent, you will lose your position.”

As a result, incidents of sexual harassment remain virtually unheard of.

“You are talking about people’s personal investments here, their own money, so it has to stay serious,” says Habis.

But without resorting to the arms of seduction, several women acknowledge that their gender can actually be an asset.

“The presence of a woman eases the atmosphere in a male dominated world,” says Habis. “And as a woman, it might be easier to obtain a meeting with a client. But once you get there, you’d better be professional and present something good, otherwise it won’t work. If you succeed in doing that, the interaction will shift away from the male-female dynamic, to one of two equal partners doing business.”

According to Dib, male clients tend to be less aggressive with women, leading to fewer confrontations and more constructive collaboration.

The upside to the economic downturn

If hard work and degrees are helping women get their foot in the door, the economic slowdown from which Lebanon has suffered over the course of the past decade has not necessarily played in their disfavor.

As local job opportunities dwindle, more men than women have chosen to pack up their bags and seek fortune abroad. With educated youth being advantaged in the emigration process, there has been a decrease in men competing for jobs in the financial industry.

Furthermore, women are willing to accept lower salaries than men, giving them a comparative advantage when applying for entry level positions.

“Women are more willing to sacrifice themselves at the initial stage,” says Dib. “They will take a lower salary, say $500 a month, with the strategy of later being rewarded for their hard work. Men tend to want to start in high positions with greater remuneration immediately.”

Men are also more frequently restricted by the burden of having to provide for their families, thereby automatically setting their minimal salary requirements above those of their female counterparts.

“Single women will be living at home with their parents, whereas married women are generally the second source of income in the household,” says Mawlawi. “Therefore, they will be willing to take a pay cut. Job satisfaction will play a greater role for women than money.”

As a result of this, women overall tend to earn less than their male colleagues, by an estimated 10 to 20%.

Less cut-throat than the West

The Arab financial industry remains a comparatively young one by European and American standards.

As a result, the job conditions have yet to reach Wall Street norms, where 100 hour work weeks and an up or out mentality prevail. The more humane job terms in Lebanon, where work weeks average 50 hours, have made it easier for women not only to enter the industry, but to stay in it after having had children.

“When I worked for Lazard investment bank in London, I would get projects that required that I stay in the office until 3 am, Monday through Sunday, for months,” says a senior corporate finance associate. “Among the 18 partners in the firm, only two were women, and they were single and without children. These types of women would be the only ones promoted. I would never have envisaged starting a family while working there. Here in Lebanon, I would consider it.”

The quality of life in Lebanon also makes the long working hours more bearable, according to Mawlawi.

“When I worked for City Bank in New York, I would get out of work at 10 pm and simply go home,” she says. “Here, you can work hard and play hard. Being able to have even just two hours of fun once you get out of the office affects your performance positively. And the fact that you have the sun and the beach gives you a proper break during the week-end. In New York, I got burnt out and needed to take vacations. Here, I haven’t had a vacation in years. The lifestyle allows you to work much harder.”

Twice the effort

Yet if women’s access to the industry may be less insurmountable than it once was, climbing the ranks whilst juggling a family life remains a daunting task, before which many are forced to cave in.

“In order to spend time with my daughter, I come into the office from 8 am to 2 pm, then I spend the afternoon with her, and go back to work from 9 pm to 1 am, unless I have a business dinner I need to attend,” Mawlawi explains. “With my first child, I worked full-time.”

“By the end of the week I am exhausted,” adds Habis, who had her two children before she began working in finance ten years ago. “You can manage, it’s just a question of organizing yourself, but it’s really tough. I work from 9 am to 6 pm, but the American markets don’t close until 11 pm, so you continue to follow up and stay in touch with the clients once you’ve left the office. Sometimes you check the markets in the middle of the night. It really is non-stop.”

All agree that compared to the amenities working mothers are offered in Europe and America, Lebanon still has a long way to go.

“Most nurseries close too early, at 3-4 o’clock, and I haven’t even been able to find one in the Solidere area,” Dib complains. “If it weren’t for my mother helping me out with the childcare, as well as my husband, and wouldn’t have been able to do it. Fortunately in this region, you have at least a solid family network that can back you up.”

According to Mawlawi, there are many options that would facilitate the task for working mothers, and that remain unexplored.

“There are no flexible work schedules available here like in the West,” she says. “One could work part time, or work from home – a lot of our work doesn’t have to be done at the office. As long as one is performing and meeting targets, one should be able to stay on. I would also like to see large companies who can afford it, such as banks, provide in-house child-care for their employees.”

Government intervention unwanted

Partly as a result of the challenges posed to combining motherhood with the demands of a challenging career, the number of women in the upper echelons remain few.

“At the very top, senior levels, it is definitely very male dominated, I will go to meetings and there will be only one other woman there, if any at all,” Mawlawi says. “At the mid-management level you will find more women, approximately 30 to 40%.”

“I have been working on the floor at BSE for four years, during which the number of women hasn’t increased at all,” notes Dib.

However few view government intervention as being the answer to promoting women in the industry. Whereas Scandinavian countries have experienced a certain degree of success with government imposed gender quotas for board of directors of listed companies, few consider these types of measures appropriate for Lebanon.

“There is already too much government interference here,” Mawlawi grumbles. “Besides, you would run the risk of sectarian quotas being mixed into it, so unless it managed professionally, I wouldn’t recommend it.”

Others see the problem first and foremost as a cultural issue among Lebanese women, on which government regulations would have little effect.

“The problem is not with the government, it’s with the women,” says Dib. “Women don’t tend to be ambitious here. In our culture, a woman’s priority should be her house. She might get a good university degree, but once she gets married and has babies, she will quit her job.”

A fervent believer in women being the architects of their own success, Habis maintains that Lebanon will be better served by not being forcefully rushed.

“Just look at our government: a few years ago, there were no women there,” she argues. “Now we have to or three, who made it due to their competence. They did so slowly, but they did it on their own. We’re on the right path. Government intervention wouldn’t be right at this point. Women will become CEOs on their own.”

Leave it to the mainstream media, from CNBC to Newsweek, to hammer a particular investment theme when it’s all a bit too late.  As they became enthused with the “Tiger Miracle” of the late 1980s, just before the collapse, and as cover stories raged about technology investment, just before it took an 80% haircut, now China is all the rage.  You can’t escape it.  Intuitively it may even make “sense”.  After all the demographics are on your side.

The bells of joy regarding China have been ringing for the last three to five years, to the point that one wonders, is this the modern day El Dorado? Will Chinese growth ever slow down? Should I not be investing in what is being billed as the “next economic superpower”? Everything ranging from booming oil prices to the collapsing prices of electronics is being linked to the perma-growth story that is China. 

It is true that China’s usage of oil has been a factor, and that its mega capacity in all things electronic coupled with its low cost of production has made it an economic engine to be reckoned with.  As the Bank of China gives lip service to calls for openness, it has continued to amass colossal reserves making it one of the top global funders.  Its share, for instance of US Treasury bond holdings has been whispered to be around 22% of all outstanding debt. This basically means that it has one of the largest claims on the US Dollar assets in the world, and it has become a key player in the global currency casino.  So in many respects, China has earned itself a role of money broker to the global financial system, and has a firm grip on the market for goods.  It has also made baby steps toward a more liberalized banking system.  All this has been happening for nearly a decade, but the proverbial “party” is over for the time being, at least when it comes to China as an investment option. 

China’s entry into the WTO in 2001, increased the trade boost engendered by the opening up of China as a production powerhouse and flooded global markets with cheap Chinese goods, all the while maintaining its position as one of the world’s top two destination for foreign direct investment (FDI), adding, according to the US State Department, $64.0 billion for a cumulative total of $563.8 billion through the end of 2004.

This situation has created, not only a flood of dollars, but also a GDP growth rate, which has averaged an eye-popping 9% over the last few years.  This has not only been the result of the massive influx of direct investment, but also the because of the amassment of a large surplus with the US, its main trading partner.  This appears to be a relatively unsustainable position, as it has created a protectionist drive in the US, and to a lesser extent in Europe, aimed at correcting this imbalance and pushing the Chinese to moderate their competitive edge. 

Most recently, there have been loud calls for China to reevaluate its currency, the Yuan, which has been pegged to the Dollar for decades and which is  thought to give China an unfair advantage, as it is accumulating a large amount of $ reserves, and in counterpart, glutting many electronics and even car production markets. So to a large extent, the road to Chinese economic dominance is paved with an unfair advantage, that of an artificially maintained exchange rate.

In a developed world where 9% usually refers to unemployment rates, especially in Europe, China has awakened the speculative juices in most players and observers, large and small. However, the path to liberal and open system, is paved with uncertainty.  So while the future of China as a powerhouse is not in question, we must remember that China is a one party dictatorship, that the gap between rich and poor has grown immensely, and last but not least, one of the pillars of its growth, in my opinion, the currency peg to the US Dollar, is in its final gasps of air. Soon, China will remind the over anxious, that it succumbs to the laws of economic cyclicality and that its opaque social and political system will need to be reformed, for it to truly embark on sustainable development. 

Take advantage of China by buying cheap LCD televisions, but be very careful when you are pondering an investment.  Lured by the hype, you will surely get bulldozed.  For one, I have included a chart of the China Fund, a US traded proxy for Chinese companies.  Obviously, and since a picture is worth a thousand words, one can see that the time to be positive on China was just before the turn of the century…As the Chinese stocks topped and rolled over, the media, and so called “analysts” have continued to aggressively promote investing in China.  The results, much like those of internet stock buy ratings in 99, would have been awful.

As the China fever picks up steam all around, and is seen as a “must own” by many portfolio managers and speculators, the pressure is on to get in on the action. 

Henry Blodget, a pillar of the high tech bubble and ex star-analyst at Merrill Lynch, is adamant that China is not the place to be, especially for the individual investor.  Since A Shares, which trade in local currency are not open to foreigners, investors are left with broadly two realistic choices to take advantage of the China story.  Obviously, becoming a Qualified Foreign Institutional Investor, which facilitates transactions in local shares and ventures is a cumbersome affair reserved mainly for large institutions and requires a hefty $10 billion to set up.

The first option is to look at proxy markets which can be expected to benefit from the Chinese economy. Hong Kong stocks have had a good record at mimicking the state of affairs in China, but they tend to be extremely closely correlated to US markets as well, so in that sense, they are not purely a bet on China.  But at least, Hong Kong has tougher listing requirements and thus tends to get better quality companies than Shanghai and Shenzen.  As recent headline calamities confirmed, there are a lot of fundamentally weak companies or even shell companies in the local market that have caused local players serious heartache, leaving thousands with unrecoverable losses.

The second option is to look at Chinese companies, which have listed in the US, in the form of an ADR (American Depository Receipt).  The caveat here, according to Mr. Blodget is that these are companies that have contracts in China but tend to be offshore entities, and this causes two problems: 1) if governance is not tight enough, the profits and losses may not be clearly reflected in the companies’ financial statements, 2) due to the companies’ structures, there may be a significant time lag in the flow of information.  Within this option, there are also several country funds (see chart).  While this may be, on the surface, the least risky way to go, its performance has been worrying of late, and the reporting suffers from the opaqueness of China’s overall compliance laissez-faire. 

So as China roars on toward becoming the world’s largest trade partner, there is, as Blodget put it a China paradox, since as “the economy is screaming along, China’s domestic markets are sucking wind—and have been for years”.  One would not gather this fact from reading the headlines and raving articles penned on China.  It seems lately that most media has focused on China as a new frontier for easy money. It tends to back this claim with the notion that one billion people are laboring hard to become rich, simultaneously.  But the truth is far from clear, even on this point, as mainland rural China is stuck in low growth-low employment cycle, and China’s new billionaires, have built their fortune on cheap labor.  From that perspective, China appears like more a booming emerging market, than a prospective member of the G8.  And while it is difficult to see any speeding up of the democratic process, there will be no change in the perception that China is a treacherous place to do business.

The pivotal point in China’ prospects is how it manages to control its growth rate in order not to jeopardize the safety of the banking system.   Periods of hyper growth, such as the last decade, has lead to relatively relaxed credit policies from banks, which could well come back to haunt them should the economy turn sour.  It is estimated that non performing (bad) loans are on the rise in China and that the country would need to maintain a very high GDP growth rate in order to avoid a full blown banking crisis.

Markets in general tend to be a discounting mechanism, i.e. they incorporate expectations, well before these expectations become reality.  As such, we can see that the real smart money “excitement” over China began nearly six years ago, as early movers saw the boom from trade that China would reap.  Of course, individual investors cannot time their moves perfectly, but what is worrying for someone looking at entering now, is that a near perfect peak or top of sorts seems to be in place sine 2003 (see chart).  This is quite relevant since it shows that China, as an investment is diverging wildly from China as a macroeconomic story.

The fact that China now has a massive surplus vis a vis the US and Europe means that there will be pressures from all sides to cool off China’s growth.  This scrutiny will likely cause more loosening of the currency peg, and more protectionist measures, in areas such as textiles and electronic goods. If one is very eager to benefit from the long term trajectory of the Chinese economy, my guess/estimate is that the safest way is to invest in US and European companies that are increasing their presence in China.  The first ones that come to mind are Motorola in the goods arena, and Union Bank of Switzerland in services.

 As it stands, India appears to be the next China, but we’ll leave that to a future piece.