The position of modern banking in the global economy vastly exceeds the main functionality that banks fulfilled during their 600-year rise since the Medicis: financing trade and warfare and serving as safe havens in times of danger. The expansion of banking and finance into universal socioeconomic denominators has come at the price of intense interdependence with national fortunes and developments outside of the safety and confinements of the bank vault. A few years ago, technology issues dominated many discussions over future banking trends. But talking global about banking today, three universal issues come to the fore that concern bankers and stakeholders, regardless of the development level reached by their national banking sector: crises, concentration of power and convergence of standards.

Banking crises are the nightmares of financial stability and big, sector-wide crashes – or, in technical terms, systemic banking crises – tend to occupy media reports and discussions over years. The Russian and Argentinean crises, for instance, are frequent examples in business stories and learned discourses alike.

Surprisingly, systemic banking crises do not crop up far and wide apart. For the last quarter of the 20th century, World Bank researchers diagnosed 113 systemic banking crises in 93 countries. Wars, loss of government credibility, transition from communism and other sweeping changes in political systems, financial and general market upheavals have been identified as leading causes for these epidemic cases of banking malaise – plus, in another main cause, interventions by international financial institutions (namely IMF and World Bank) set off numerous outbreaks.

According to the historic research, Lebanon experienced one war-triggered systemic banking crisis between 1988 and 1990, with four insolvencies and 11 banks coming to depend on central bank bailouts. But while the country continues to receive warnings of another potential systemic crisis, the general international and local consensus is that the danger is minor, and Lebanon’s bankers do not rip out their hair in fits of crisis fear. As far as crisis candidates are concerned, the banking industry in China’s overheated economy today is the focal points of worries.

Concentration is the other inescapable reality, with larger and larger mergers. Between January and May 2004 alone, four, billion-dollar bank merger projects were announced in the US, the latest and smallest of them valued at $7 billion, between regional players SunTrust and National Commercial Finance would create America’s seventh-largest bank with $148 billion in assets. The $10.5 billion acquisition of Cleveland-based Charter One Financial by the Royal Bank of Scotland illustrates a recent trend of European banks to buy American. Even Germany’s Sparkassen, a conglomerate of savings institutions with entrenched provincial high street image, last month started talking about becoming “global players.” Lebanese bank mergers, although puny by comparison, follow the same logic, which is not abating.

Last but certainly not least, actors in national banking industries are coerced to increasingly adjust to standards that are streamlining their operations to meet the economic and political codes of the world’s leading powers and international institutions. The Basel II rules of the Bank for International Settlements (BIS) and the money laundering regulations by the OECD-created Financial Action Task Force (FATF) are the crucial determinants for accelerating uniformity in global banking.

Since its inception in 1989, the FATF has progressed and significantly expanded its influence especially in the last five years. Lebanon got a strong dose of FATF experience when it was placed on the organization’s non-compliance list in 2001 and had to make legislative and institutional efforts to be removed in 2002. The countries collaborating on the issues of combating money laundering and terrorism finance through the world’s financial networks have just extended the FATF mandate until December 2012. Although the May 14 decision spoke of a temporary mandate, this looks pretty permanent. Authorities and bankers in Lebanon, thoroughly committed to safeguarding national capacities as banking center, know that they have to satisfy the new global rules against money laundering and terrorism finance, just as much as they have to gear banking performance up to meet the Basle II standards over the next few short years.

Against these global macro trends, current concerns in the Lebanese banking industry are at the same time relaxingly minor and yet illustrate the need to embark on further qualitative development efforts. If the 2003 and first quarter 2004 performance of Lebanon’s listed banks were reported in a developed stock market, a rally of banking values would be as safe a prediction to make as one ever could in the craft of market guessing. The results of the Lebanese banking sector for the past 12 months were simply beyond expectations, with the numbers for the six listed banks speaking loudly.

The published balance sheet of Banque Audi, the bank at the center of attention since their successful merger deal with Banque Saradar, recorded 35% growth in total assets over 12 months ending March 31, 2004, to $7.51 billion. This increase was equaled by Audi’s 35.4% gain in customer deposits. At $6.29 billion in customer deposits, the bank’s market share of total banking deposits reached 12.7%.

Net income at Banque Audi for the first three months of 2004 was $14.5 million, an improvement of 13% on the same period last year. According to a Banque Audi press release, these figures are in line with quarterly result averages of 2003 and reflect the bank’s position without including figures for Banque Saradar following the rapprochement between the two entities.

BLOM Bank, the leader in terms of total assets, continued their growth with a 22% increase in each, assets and deposits to $9.2 billion and $8 billion between the end of March 2003 and end of March 2004. BLOM net profits for the first quarter of 2004 amounted to $22.4 million, up 0.9% over Q1 2003.

Assets of Byblos Bank climbed by 13.6% to $6.2 billion over the 12 months ending March 31, 2004, and customer deposits rose by 16.3% to $5.1 billion. The bank achieved a net income of $10.3 million in the last quarter. This marked a drop of 12.7 % over the same period in 2003, which the bank attributed to a tightening in its net interest margin from 2.63% to 1.81% between the two periods, due to its “conservative strategy to keep highly liquid assets.”

At Bank of Beirut, improvement of assets was by 11.3%, to stand at $3.66 billion at March 31, while customer deposits rose by 15.1% over the past 12 months, to $2.56 billion. BoB achieved net profits of $4.8 million for the first quarter, a gain of 14% over the same period in 2003. BLC Bank succeeded in achieving assets of $1.62 billion and customer deposits of $1.33 billion at the end of March, improving by 27.7% and 26.3%, respectively, from March 2003. Under the central bank-installed new management, BLC reported an increase of almost 93% in its gross income at the end of the first quarter and an unaudited net income of $3.55 million, a turnaround from a $2.1 million loss in Q1 2003. Non-performing loans still accounted for 78.5% of BLC’s total loan portfolio of nearly $720 million. BEMO Bank recorded an increase in total assets of 12.7% year-on-year, to $562.4 million at the end of March, with customer deposits growing by 9.2%, to $432 million. Net income at BEMO was $1.06 million in the first quarter, which signified a noteworthy increase of 50.9% over Q1 2003.

In summary, the banking sector performance clearly defied cautious predictions made by experts one year ago. “Banking performance has been more satisfactory than I projected, because resources from investors increased by 14%, a fairly significant amount under the climate we are in,” said Marwan Iskandar, one of Lebanon’s leading economists. He attributed the sector’s good results largely to Arab investors “who find it convenient to place some money in Lebanon.” Several major ventures brought funds into the country, notably the Sannine Zenith project whose land purchases had been undertaken mostly in 2003, Iskandar added.

A leading banker agreed that sector results beat forecasts but cautioned, on condition of anonymity, that first quarter profit statements of some players might show strong increases only based on their revaluation of eurobond assets. “Most Lebanese banks hold eurobonds to maturity. By revaluing eurobonds as market-to-market, banks can state profits instead of keeping them hidden – but these are one-off gains,” he said.

Banking analysts also reiterated the long-standing admonition that the, albeit substantially diminished, possibility of sovereign insolvency would be extremely dangerous for many of Lebanon’s large banks. They still have 30% to 35% of total balance sheet exposure to government debt, meaning, “if the currency collapses, all are in trouble.” But these realities can be quite safely considered to be non-threatening to the development of the banking sector at least in the near future. In the opinion of Iskandar, there are no reasons to anticipate any major worries in the Lebanese banking industry for 2004, as the crisis over Bank Al Madina has been largely resolved and the formation of the Audi-Saradar Group created the basis for a major Lebanese financial institution with regional and international reach. The sector could even witness another step in the evolution of massive banking power, Iskandar said, pointing to “serious discussions” as ongoing between the Audi-Saradar Group and Banque Libano-Francaise for yet another big merger move.

The majority shareholder in BLF, French banking group Credit Agricole, has for some time been known to seek to reposition their involvement in Lebanon. BLF, one of the five first banks in the country, had already twice been engaged in merger discussions in the past three years – once with Banque Saradar and once with Banque Audi.

Also for near-term fund inflows, Iskandar maintained a strong outlook. “Indicators for inflows of Arab money are promising this year, perhaps slightly better than last year,“ he said.

Merger Ability

It is an accepted business paradigm that mergers can be instrumental in corporate growth, especially as positions in the top three companies are in many sectors associated with taking the lion’s share in total profits realized in the sector. However, the overall global picture shows that the majority of mergers are unsuccessful because they either fail outright or the financial savings of consolidation, mostly capital and expense synergies, are in the end not larger than the costs incurred through the merger. A crucial factor in the ability to acquire and integrate another company is determined by information technology and systems. Paul McCrossan, an international expert and consultant in merger negotiations among financial firms, told a Beirut seminar last month that in his experience, “a company with an excellent computer based administrative system can absorb another company one third its size with a similar product mix with almost no additional administrative staff – if it has a decent administration system.”

Banks in the alpha group have established good IT systems and automation levels, which would meet the requirement for technical administrative capacities that increase the ability to integrate a smaller bank.

Transparency of operations and openness of corporate culture are further factors seen as supportive of integrative abilities in a business organization, whereas the fixation of the entity on a single dominant individual as top decision maker is regarded as a potential obstacle.

For the record, a full nine of the 12 banks in the lead of the industry have accomplished acquisitions of smaller banks. Byblos Bank, SGBL, Bank of Beirut and Fransabank have the strongest track records for completed mergers and acquisitions in the last five years. Before shouldering the responsibility for building the Audi-Saradar group, both parties to the rapprochement had succeeded in absorbing smaller banks. Banque de la Méditerranée, although it does not prioritize presenting the public with a transparent view of its balance sheet figures and processes to the extent practiced by its peers, also has the systems and proved its ability to integrate a smaller bank into its group by buying Allied Business Bank in November 2001. Credit Libanais, which had undertaken two acquisitions in 1994 and one back in 1977, picked up the business of the American Express Bank in Lebanon in June 2000. These often-quoted merger waves and their sector-purging effect not withstanding, experts contend that the institutionalization process of Lebanese banks has been uneven and describe personality-centric management cultures in at least two big banks as obstacles standing against maximization of benefits from mergers, both potential and actual. From negotiations over assimilation of numerous small banks into larger ones in the past 10 years, it is also evident that the acquisition candidates –specifically because of lacking financial transparency but also owing to vanity issues on part of owners – have presented difficult negotiation partners.

Corporate governance

A critical qualitative category, and major buzzword in management seminars, is corporate governance. Although the level of corporate governance has improved over the past decade in all leading banks and human resources strategies have been implemented, experts view the level of institutionalization and corporate governance achievements in Lebanese banks as still lagging behind international standards. Good internal communications are crucial for achieving a high-quality corporate governance and strong identification between employees and bank. Proactive Lebanese banks have moved towards open door policies and open communications structures. In several major banks, however, employees admonish that communication fails in terms of reciprocity. Especially performance reviews are strictly one-way processes, top-down, and evaluations of their superiors by employees are missing from the corporate culture. Talking to Executive in confidence, banking insiders with many years of experience in operations and middle management raised further serious questions on the progress of corporate governance (see box).

The positive outlier in terms of achieving a corporate governance quality that is comparable to good, although not the top internationally achieved levels is Banque Audi, with Bank of Beirut and SGBL also mentioned by analysts and consultants as advanced on the path to fulfilling institutionalization.

Business Community Relations

The business community interactions between a bank and society are of two main categories, relations with customers, peers and business partners, and fulfillment of corporate social responsibility. Customers, who are the life of the bank, are treated generally with more courtesy and professionalism than in the mid nineties, when retail banking was traipsing precariously onto new grounds of customer relations. However, banks still get less flattering remarks when it comes to taking proactive roles in understanding and responding to customer needs. As ample anecdotal evidence from business and retail banking clients shows, customers still feel that banks are difficult to deal with, often bureaucratic, and less accommodating in practice than in their advertising projections.

The term corporate social responsibility (CSR) attaches a strategic quality to the contributions an enterprise makes to the community. CSR has been a concept on steady global advance for some 10 years. From large multinationals to niche entrepreneurs, corporations are emphasizing CSR as a core aspect of their identity and adopting the practice of publishing dedicated CSR reports. Lebanese banks by and large do not yet carry an emblematic CSR identity. However, banks are among the most socially active enterprises in Lebanon. Albeit showing a larger gap between local performance and international standards than for other qualitative elements, about half of the banks in the alpha group are perceived as more active than most in terms of contributing to their communities. What Lebanese banks generally have been lacking in, was adoption of specific areas of concentration and development of track records in pursuing a relevant CSR agenda and consistent activities, whether in ecological, social, educational, cultural or inter-communal dialogue. As an epitome in every assessment of quality achievements in the non-balance sheet dimension of Lebanese banks, one guiding thought should accompany the reflection on the status quo and continued strife after excellence: banking is a serious business but it is up to all stakeholders to put money matters daily into the context of the living qualities and inalienable truths that endow the entire play of funds and finances with value. A drop of humor, perhaps even self-irony, goes a long way in keeping the serious from falling dead serious.

Fair Game?

Unfair payscales and a glass ceiling are holding back the advancement of employees

Salary fairness, evaluation procedures and equal opportunities are still tender spots in the corporate culture of Lebanese banks. Although bank employees have, by national standards, an exceptional average income, the high total salaries over costs ratios at banks camouflage huge income gaps. Three to 4% of the workforce benefits from, by Lebanese standards, very large salaries, said an insider. A division head in a big bank can take home $150,000 in annual compensation but another executive in the same division, who holds near identical qualifications and responsibilities, but with a slightly lower position, would be paid no more than $30,000 or $40,000.

When no performance bonuses and incentives are paid, as was the case in several banks in recent years, motivation to provide outstanding service diminishes. Talking among themselves and to friends, increasing numbers of employees also express high frustration levels because they are aware of the exact financial gains that their work contributes to the bank but see their salary increases as disproportionately small in comparison to their productivity. This job dissatisfaction on the branch level can be exacerbated if local managers are perceived as under qualified. According to banking analysts, some branch heads are paid not because of their managerial skills but hold their positions solely on the basis of their pull as ranking members in the local township, which the bank regards as essential for attracting customers from the community. Banks accomplished opening the career ladder to women up to the middle and some upper management positions. The echelons above those levels, however, have thus far remained closed. “Are Lebanese banks ready to appoint a woman to the post of chairman or general manager? Certainly not today and not tomorrow,” said a senior female corporate loan manager in the upper ranks of a major bank, who deals with companies above $5 million in turnover. If a woman is both highly qualified and outspoken, her stand in the acquiescence driven and male-dominated Lebanese business environment is decidedly tough. “I am not a ‘yes person;’ that is why I have a lot of problems in my professional life,” she said, “but sex discrimination is not as obvious as some other forms of discrimination. If someone says that there is no religious discrimination in the banking workplace, they are lying.”

Relying entirely on organic growth of their business, BLOM Bank carried the baton of leading the Lebanese banking sector in terms of assets for more than two decades. As the creation of the Audi-Saradar Group is exerting consolidation pressure at the top of the sector, EXECUTIVE wanted to know how BLOM Bank views recent developments and if the bank is changing its strategies. EXECUTIVE asked and BLOM vice chairman and general manager, Saad Azhari, answered.

As the leader in the Lebanese banking sector, you have seen a new group emerging besides you, a competitor of regional format. How does that affect your plans and ambitions?

Our policy will not change, in terms of looking that we have a strong bank, that our assets are good assets, and making sure that our shareholders always get the best return. BLOM Bank has an important size in the Lebanese market and we achieved this in continuous internal growth over 40 years, which allowed us to contain costs. Our level of cost to income is extremely low. That is why we have the highest return on our equity, and the lowest cost to income ratio. And that is why we have also the highest rating. We are the only BBB+ rated company by ratings agency, Capital Intelligence.

What do you regard as the key factor enabling you to reach market leadership?

We achieved this position of number one because of the confidence of our customers and we have been number for over 20 years, since 1981. Our customers believed that we provide security and a good service, and came to us because of that. We are still continuing to grow at a rapid pace and increasing our market share, as our figures for this year show.

Did merger and acquisition projects ever play a part in your development plans?

I cannot hide that there were a lot of merger discussions between us and other banks. Frankly, we found that elements that we require were missing: either the price was too high or the quality was not good. We would definitely not buy a bank just to grow. Some of the banks we discussed with, both foreign and local banks, have been bought by other banks.

How do you view mergers in Lebanon in terms of their benefits to the bottom line of the banks that went this road? 

Figures talk. Compare the actual present size of the banks that merged with what should have been their size, and look at BLOM. If you compare the risk profiles and look at profits of BLOM and the profits of banks that have merged, you will see that BLOM has the highest level of profits, even as it does not have the highest level of loans. Here you have high profit and low risk. What is better: high profit and low risk or high risk and lower profit? You judge for yourself.

If a new merger or acquisition prospect would enable you to ascertain the status of largest bank in Lebanon, would you pursue it more actively than in the past?

No. Our strategy will not change. For any merger to happen, it has to be sure that the quality of our assets will not deteriorate and that it does not negatively affect the return to our shareholders. Those are the essentials for us. We want to stay a strong bank with the highest rating in Lebanon. It is also very important to us to be able to give a good service to our customers.

Would you consider a merger as means to facilitate regional expansion?

BLOM Bank is the Lebanese bank with the strongest presence abroad. We have a subsidiary in Paris, which has branches in London, Dubai, Muscat and Sharjah. We have an offshore in Cyprus and we have constituted a bank in Syria where we have management control. We are also opening a branch in Jordan. We are expanding wherever we think it is possible and interesting for us.

It is often said that Lebanese banks need to be stronger and considerably larger in size to successfully compete in the region. What is your perspective on this?

I think that the size of the banks in Lebanon compares well to banks in the region. Compare the size of Kuwaiti banks and Lebanese banks, for example. The assets and deposits in Lebanese banks are almost twice of those in Kuwaiti banks. The banking sector in Lebanon is number three in size in the Arab countries, after Saudi Arabia and Egypt. Lebanese banks are growing larger and larger and today have large asset volumes. For example, we ourselves have passed $9 billion in assets. Our size is large compared to the economy and with our shareholders’ equity; we are over capitalized when compared to the risks on our balance sheets. We already have a good size compared to the region, we are able to have a presence outside and we have the possibility to expand.

So you do not consider large regional banks as having a size advantage over BLOM and other Lebanese banks?

Many Arab and foreign banks have a presence in Lebanon. Lebanon is an open market, while some regional markets are closed to us. I think we have a future advantage as these markets are opening up. Jordan is an example. Before, we could buy a bank in Jordan but not open a branch. As this has now been allowed, we are opening a branch there in September of this year. Lebanese banks have important opportunities in the region and I hope that we will be playing a much more important role in future.

Where does BLOM set priorities for domestic development?

We at BLOM have seen important growth in corporate banking and also in retail banking. This is for specific reasons. Retail is still a developing sector, where all banks increased their activities. In corporate lending, big corporate names here were historically mostly dealing with foreign banks. Some foreign banks have already moved out or are planning to move out of Lebanon. BLOM saw this opportunity. Last year, we created a corporate unit and effectively grabbed an important amount of clients that used to deal with foreign banks, which either left or are scaling down their portfolio, mostly because of Basel II and the strategy of international banks to reduce their exposure to emerging markets. That is why our loan portfolio had a good growth in lending last year, even though the lending in the Lebanese market was generally stable.

What is your ratio of non-performing loans?

The non-provisioned non-performing loans stand at less than one percent, 0.5 to 0.6%.

How important are private and investment banking in your activities?

In Lebanon, private banking is generally very limited, frankly speaking. You cannot strengthen private banking much, especially because of the taxes that the government collects on interests on international bonds. The big private banking activity is done by our subsidiary in Geneva. We have an investment bank that is mostly specialized in medium and long-term lending. Corporate and retail are expanding at a faster pace than other activities, but we are working in all activities.

Have Lebanese banks improved as much in non-balance sheet capabilities and quality as they grew in terms of balance sheets?

The services given by banks have improved a lot over the past years. Before, you had to deal with three or four people at a bank branch, to undertake an operation such as depositing a check or transferring money. Today some banks, including ourselves, have a teller system, in which one person can facilitate your operations. Secondly, delivery channels and their variety improved a lot. Before, the only option was to go to the bank. Today you can use ATM, phone banking, internet banking, and the call center. In standard of services, Lebanon has arrived at a very high level in worldwide comparison. You cannot see this from the balance sheet but you can see it through the operations, dealing with the bank.

Do you expect the banking sector to continue its first quarter good performance in the remainder of 2004?

It will definitely not be an easy year, because the treasury bills that Lebanese banks had bought before Paris II, especially in September, October, and November of 2002, will all mature by end of 2004. Those treasury bills carried a high interest rate and banks hold a large number of them. The renewals will be at a much lower rate. Secondly, we have to put a legal reserve of 15% of our US dollar deposits at the central bank. A central bank circular in 2002 asked banks to deposit a certain level of their dollar reserves for two years with the central bank, at interest rates that first stood at 9% and then were lowered to 8.75 % at the end of 2002. These two-year deposits are all maturing and will be replaced at a much lower rate. Banks thus are definitely going to be squeezed on those interest margins.

How about deposits by Arab investors?

We are continuing to see an important growth of deposits coming towards Lebanon from Lebanese and Gulf countries, and the pace may be a bit higher than last year. This is a good sign of confidence. We are also continuing to see interest in different projects. I have recently been in Kuwait and met a lot of people who are interested to buy homes in Lebanon. And some of the big groups there want to undertake important projects here. The same is true for groups from Saudi Arabia and the Emirates.

So overall, your expectation for 2004 is for a smooth year?

In general terms, 2004 will achieve a good growth of deposits and assets for the banking sector in Lebanon. There is going to be more pressure on banks in terms of profits towards the end of the year, and perhaps there will be a slight decrease in profits. We will not see a repeat performance of 2003. It would be good if banks can achieve stability of profits, which is a little difficult. Banks are expanding and all banks are trying to increase their market share and there is more competition. Overall, I don’t see any troubles in 2004.