It all seemed to be going so well for Lebanese wine. Once the sole preserve of Musar, Ksara and Kefraya, the sector has, since the late 90s, seen the emergence of new wineries, producing exciting wines in eye-catching bottles. The UVL (Union Vinicole du Liban), established in 1997, showed it could function as a genuine association. It was serious about establishing a regulatory national wine institute and there was even a spirited initiative to sell Lebanon as a wine tourism destination. Its members even demonstrated rare ESPRIT DE CORPS by exhibiting on the same stand at the two major international wine fairs in London and Bordeaux in 2003. Lebanese wine was moving.

This momentum had been inspired by the knowledge that Lebanon was hosting the annual OIV (OFFICE INTERNATIONAL DE LA VIGNE ET DU VIN) congress in Beirut in June 2005. The event would enhance the country’s brand equity, strengthening its export potential and boosting its quality to price ratio. It would create a new image of Lebanon, one driven by wine and culture, rather than war and mayhem. Finally, UVL president, Serge Hochar, co-owner of Chateau Musar and for so long the darling of the wine world, the man who risked life and limb to make wine during the dark days of the war, would welcome the OIV to his country. It was to be a truly vintage year for Lebanese wine. And then, last month came the awkward admission from UVL members that the OIV had changed its mind. So far no official explanation has been given by the OIV for the seemingly sudden VOLTE-FACE and at the time of going to print, Frederico Castelluci, director general of the OIV has not replied to EXECUTIVE’s requests for clarification. “It is a huge loss to Lebanon,” said Charles Ghostine, managing director of Ksara, Lebanon’s biggest producer. “We have not yet received official notification; this will be sent to the Lebanese government. However, I do not hold much hope of the congress being held in Beirut next year.” Ghostine has more reason to be disappointed than most. In June of last year, he gave a speech at the OIV congress in Paris, in which he outlined Lebanon’s plans for 2005. “All 45 countries, including Israel, gave me a standing ovation,” he said. “We were meant to go to Vienna this summer to present our final itinerary. Then I get the call from Frederico Castelluci, telling me that there was a change of plan.”

Ghostine said Castelluci had told him that the reason for the change of venue stemmed from the organization’s doubt that Lebanon had the “technical ability” to manage some of the more scientific and linguistic aspects of the congress. “They need translators in five languages. This is not a problem. We can translate in six,” said Ghostine. Privately, wine producers believe pressure from the Israeli delegation was the main driving force behind the decision. “The OIV is a non-political body and therefore they cannot cite a non-political reason,” said one. “What can we do? We need them more than they need us.”

Ghostine’s frustration is evident when he talks of missed opportunities, especially in the export markets. “The recognition the congress would have bestowed upon us would have been priceless. To be honest we are still not fully established as a wine making force even though we have be doing it for 6,000 years,” he said. “The congress would have given up priceless exposure. Export markets are very important to us. Lebanon is exporting 40% of its wine.” UVL president, Serge Hochar was equally uncomfortable with the turn of events. “Until we have an official notification from the OIV, I prefer not to comment.” The demise of Beirut 2005 came as a surprise to many of those who had worked hard within the government to ensure it happened. “It’s the first I have heard of it,” said Basil Fuleihan, ex-economy minister and now the chairman of the Parliamentary Committee on Economic Affairs, Trade, Industry and Planning. “Quite frankly if it turns out to be true, it is very disappointing news for Lebanon and Lebanese wine.” While in office, Fuleihan lobbied hard for the congress and is a firm believer in the potential of the sector. “Lebanese wine needs to be supported. It is good for general prosperity; it’s good for exports and it’s good for the image of Lebanon.”

Teething problems

The news came at a time when the UVL has been experiencing delayed teething problems. In January, Massaya, one of the most energetic of the new generation of wine producers, resigned after it claimed the association was dragging its heels on an initiative to establish a wine marketing board and launch a national advertising campaign. A statement issued by Massaya, which had vigorously lobbied for the move, said that it was obvious that the interests of Massaya and the UVL were irreconcilable and that the winery had no option but to go it alone.

Elsewhere plans to establish a national wine institute (to be responsible for implementing the 2000 wine law and oversee and regulate all areas of grape growing and wine production) seem to be caught in a bureaucratic bottleneck. “We have prepared our draft constitution,” said Ghostine. “Now we are just waiting for government approval. We are confident our file is in order.” According to Hochar, its establishment is crucial to the evolutionary progress of the sector. Speaking in November of last year he announced: “We have joined the OIV and we have passed a wine law. Now we just need an institute to implement it,” he said. “We cannot move forward without it.” UVL members are energetic exhibition-goers, although last month only three producers – Musar, Ksara and Kefraya – made it to the London Wine Fair. The energy of 2003 appears to have waned. “The reason we all went to London last year was that we got money from the EU,” explained Massaya’s Ramzi Ghosn. “All this needs intensive lobbying on behalf of the UVL and this in turn requires time and effort. Nothing will come of nothing.”

Still, Lebanon’s $26 million wine industry is essentially filled with promise. The good news is that exports have doubled in six years and producers continue to consolidate proven international markets, while seeking out new ones. Ksara alone has doubled its exports and is consolidating its position in the UK, a market pioneered by Chateau Musar in the 70s and one that also proved successful for Kefraya, Massaya and Clos St Thomas. The future

The good news is there is room for further growth. “There is huge potential. Any collaboration with the wine growers has been done with the best interests of the sector at heart. I have not sensed any official reluctance,” said Fuleihan, stressing the government’s faith in the industry. “All the grievances have been addressed such as tariffs and taxation. Yes, the government has not yet developed a viable agro or industrial strategy but we cannot satisfy the entire spectrum of demands because of the existing financial constraint.”

What is certain is that the land is there for further planting, although many within the industry prefer to exercise caution. “We just cannot plant without a strategy,” said Paulette Chlela, Ksara’s Chef de Culture. “We have already seen grape prices drop by 10% in the last year because of a dip in demand.”

But the overriding belief is one of an opportunity that needs to be seized. “Wine is the only hope for the Bekaa,” believes Ghosn. “In some areas this reality is taking shape while in others it will take a bit more time. New grape plantations have changed the lives of many of the Bekaa’s struggling farmers, who have been forced to grow illegal hashish and opium, or produce that was severely undercut by those from neighboring countries. The landscape of many towns is changing as the demand for good TERROIR increases.”

Ghosn also believes that to best demonstrate the value-added Lebanon has to offer the wine world, more producers should improve viticulture methods, moving away from high to lower, more concentrated yields and use better quality grapes. “To do this, there will have to be significant replanting or restructuring of existing vineyards, the adoption of more up-to-date working methods, and new vineyards. This will mean further exploration of Lebanon’s different regions and TERROIR, including a formal study of the various soil types and viticultural potential.” However, as the sector grows, the incidence of malpractice will undoubtedly increase. The UVL must snuff out those producers tempted to push the ethical envelope and clamp down on the importation of foreign wine in bulk quantities, over-harvesting, medal sticker abuse, diluting and misrepresentation. “It has already started,” shrugged Dargham Touma, owner of the Heritage winery, alluding the increasing number of Syrian-made “Lebanese” wines that are reportedly finding their way into Lebanese and North African restaurants in France. The national institute cannot come soon enough.

Nor can a national marketing campaign, one that would emphasize the quality of Lebanese wine as well as educating the drinker on the health benefits of drinking and stress the economic importance of buying Lebanese. Already, the wines are facing an epic struggle in an evolved and viciously competitive drinks sector. “Whisky and Vodka are king,” exclaimed Touma. “External budgets are dictating consumer budgets. They are telling people what to drink and what not to drink.” Given many of the mediocre brands that are being pushed in the local market, it is sad that many of Lebanon’s best wines are unknown to local drinkers, who in a misguided exercise in snobbery often perceive foreign wines as better. Oz Clarke, the English wine guru has rated Clos St Thomas’ “Chateau” as “stunning”, while only last month Jancis Robinson, arguably an even bigger hitter than Clarke, raved about Massaya at a tasting in London.

Tell that to the OIV.
 

If you think that soldiers of fortune went out with Frederick Forsythe and the last colonial war in Africa, think again. The dogs of war are back big time, compliments of the US occupation of Iraq. Except in our more politically correct world, the word “mercenary” has been dropped from our vocabulary and replaced with the more acceptable term: “civilian contractor.” It is difficult to say exactly how much their presence is netting the US private sector – the firms employing them are mum – but it is safe to assume that the US government is saving a great deal on costs that would otherwise be incurred if they used regular troops.

The brutal slaying of four unfortunate Americans in Fallujah made front-page news the world over, as did the prisoner abuse in the Abu Ghraib prison, where civilian guards were said to be involved. But just who are these mysterious “contractors,” what exactly do they do, why are they there, and who are they answerable to? Let’s start at the beginning. Ever since there were wars, there have been men – and sometimes women – who tag along with the military to carry out chores that soldiers do not want to do. For logistical reasons the military high command finds it easier, better, cheaper, and less complicated to have civilians do those odd jobs instead. But like everything else, there are both advantages and disadvantages in hiring outside help.

But to understand the current phenomenon that has drawn anywhere from 20,000 to 40,000 civilian contractors to Iraq, making them the second-largest military force in the country after the US, we need to understand first why such a large number of civilians has been “drafted” into a war zone.

Under the leadership of Donald Rumsfeld, and against the better judgment of some of his generals, the American secretary of defense took the decision to reduce the size of the US military around the world. The Cold War was over, and Rumsfled argued, there were no pressing needs to maintain large numbers of troops and bases around the world. Rumsfeld believed that modern warfare could be fought effectively with superior air power, good, solid intelligence – mostly electronic – and far fewer “boots on the ground.”

His rationale was proven during the Afghanistan war, which started shortly after the attacks of September 2001. The US quite simply dominated the skies with its air force and precise computer-guided missiles. American spy satellites could spot enemy movement from outer space and direct elite troops on the ground to take appropriate action as needed. They could listen to enemy communications and preempt their moves. Unmanned drones could spy on enemy troop movements and relay live data, including television images to frontline commanders for quick reaction by Special Forces.

The invasion of Afghanistan to oust the Taliban and attempt to capture Osama bin Laden required limited troops on the ground. Smaller tactical units of Special Forces, Army Rangers, Green Berets and Navy Seals supported from the air, indeed proved to be most effective. Rumsfeld’s idea of a smaller, leaner, military seemed to have worked; in theory, at least.

In Iraq a very different battle plan was needed with the generals calling for at least 350,000 troops in order to do the job properly. Certainly the United States could blitzkrieg, as it did, in record time, taking barely three weeks to occupy the entire country. Maintaining the occupation has been harder.

Rumsfeld insisted the occupation of Iraq could be properly maintained with roughly 130,000 troops. But what he did not tell the American people was that to sustain those troop numbers, he would need the support of another 40,000 civilians to back up the military.

Enter the civilian contractors, who can be broken down into two distinct categories. The first is the genuine civilians, such as truck drivers, cooks, cleaners, mechanics and builders. They drive supply trucks, repair tanks and provide housing for the troops. Their pay is significantly superior roughly ten time what they would make in the US, given the discomfort of living in a war zone and the dangers involved. Of those, there are roughly 20,000 working in Iraq today. Or at least there were, until Westerners became the target of kidnappers and many took fright and left.

The second group of civilian contractors – of which there were also about 20,000 – is armed. Some even use helicopters with mounted guns for protection. These are mainly former military Special Forces types, who enlist their services in exchange for money, much as a mercenary would. They provide security to government buildings where American employees work and live.

Almost all US agencies – the State Department and the US Agency for International Development, the Commerce Department, the Defense Department and the US army – all have contractors working for them, or are administering contracts that have contractors working for them. They are also tasked to provide security for the civilian contractors and to protect their convoys or their work and housing sites. The four contractors who were brutally killed and had their body parts hung over a bridge in Fallujah, were former US Navy Seals on irresistible contracts.

Some of these contractors have been involved in firefights with Iraqi insurgents, and others had to fight their way out of tense situations. But more stunning was the recent discovery, when the Abu Ghraib prisoner abuse scandal broke last month, that civilian contractors were used in the interrogation of prisoners, tactics previously unheard of in military annals.
It is important to note that we are not talking about civilians in the employment of the government, such as the CIA or FBI, but of truly just civilians, hired specifically for that purpose.

A number of US companies, such as Virginia-based CACI, have advertised for interrogators, among other positions that require US government security clearance. As a rule, those are usually people with prior experience in their field – like former intelligence officers who worked for the CIA, DIA or the FBI. Still, it remains highly unusual to bring in civilians to perform such tasks as interrogating prisoner.

Why is this happening? Well, in the case of the first category, the civilian-civilian contractors, as mentioned above, the US military has been reduced in size. To make up the deficit in manpower, the defense department is forced to turn to outside help. To enlist more troops would not solve the problem, as it’s also a matter of economics. It’s the bottom line that Rumsfeld is watching for.

In simple terms: it’s true that a civilian hired to drive a truck loaded with gas, ammunition or MREs (meals ready to eat) from Basra to Baghdad will on average earn 10 times more than a soldier doing the same job. However, consider this: the contractor gets a lump sum of money and that’s the end of the story. There is no insurance for the government to pay. If he gets hit, there are no medical costs involved. Most likely his employer, the one that contracted him, would cover insurance costs, or he would do so himself.

A wounded soldier, besides costing the government medical expenses, necessitates the support of doctors, nurses, medical technicians and staff. It takes an entire team to care for every wounded GI. All this requires resources and costs money.

Additionally, if the soldier is disabled, the government will have to pay him compensation and cover long-term hospitalization, if required, and the military would then have to replace him in the field. Not so with a contractor; he gets hit, he leaves, the government hires another one. End of story. Total savings for Uncle Sam are roughly in the thousands of dollars per man, while it remains difficult to pin down exact numbers, because no study was released by the Pentagon on this subject.

Another advantage is if contractors get killed. They don’t figure in the “official” US death toll. No one really knows how many contractors have been killed in Iraq. Nor, for that matter, does anyone really know how many are operating in Iraq. Not even the Pentagon has figures for them. The closest one gets is an estimate of “about 20,000.”

The second category, the armed civilian contractors, are more aptly described as ‘mercenaries.’ They are ready to kill and even be killed, not for God and country, but for financial reward.

Again, there are no published figures, nor casualty reports concerning armed contractors. The Pentagon only reports military dead and wounded and offers no insight into losses – if any – from the ranks of armed contractors. And their employers, usually firms who try to avoid publicity, tend to shy away from the press.

One frightening fact to emerge from the Iraqi prisoners abuse scandal was that no one was able to identify a proper chain of command concerning civilian contractors involved in the interrogations. The US military commanders in charge of the Abu Ghraib prison did not know who the civilian interrogators in the jail reported to, and who answered for them.

Strange times, indeed.

Did the Audi-Saradar merger hint at a possible consolidation trend in the Lebanese banking sector, or was it a one off? The sector has seen a number of waves of mergers and acquisitions in recent years, especially in the beginning of the post-war era, as some larger banks capitalized on the difficult situation in the early and mid-1990s to eat up smaller ones. Many large banks looked to expand their branch networks, and realized the most efficient way to achieve this was through the acquisition of smaller ones.

Since then however, branch network expansion is no longer the primary goal of leading banks in the country, and can therefore no longer trigger significant mergers and acquisitions. Nevertheless, other drivers that can inspire consolidation in the global banking industry are present in the market and are likely to ignite a similar wave locally.

The gap between the top Lebanese banks and the smaller ones is constantly widening, with a marked concentration of deposits and loans among the top 20 banks. Top banks are constantly seeking to fend off competition from large regional banks by achieving a larger scale and striving for higher quality services. By targeting certain specialized institutions through ‘horizontal’ consolidation, these banks can achieve critical mass in terms of the financial resources, skill, and geographical diversification needed for competing on a regional scale (amply demonstrated by Audi’s acquisition of Saradar, which gave it a private banking unit and access to the Gulf market). Furthermore, Lebanese banks face sizeable overhead costs, and as such, they would substantially benefit from spreading such costs over a wider asset base. Another driver for consolidation is the access to distribution channels and new markets. Regional and international banks, such as NBK, Gulf Bank, HSBC and Standard Chartered, have established a presence in almost every major city in the Middle East. As the region is becoming more economically cohesive, businesses require “fully regional banks.” Lebanese banks should attempt to establish a widespread presence if they are to retain a role. Currently, a number of medium and large Lebanese banks do have branches in certain neighboring markets. Consolidating such banks under one institutional roof with a regional presence would certainly provide competitive advantages to the overall sector. The highly competitive domestic banking environment in Lebanon, coupled with the threat brought on by regional banks, is already forcing Lebanese institutions to look to nearby markets to expand into. As such, many banks are making distinct efforts to plow into the GCC market (Audi-Saradar, BEMO Bank), the African market (Byblos), and the Levant (SGBL, BEMO-Saudi Fransi, BLOM, Fransabank).

EXECUTIVE has identified 10 banks (from the “gamma ” and “delta ” groups of banks) that it believes offer attractive merger and acquisition opportunities. The order in which the following banks are listed is by no means an indicator of preference, and their inclusion in no way indicates a willingness of the existing shareholders of those banks to entertain the possibility of consolidation.

Al Mawarid Bank SAL

Al Mawarid Bank, ranked number 21 in the banking sector, was established in 1980. Following some limited growth during and immediately following the war, the bank’s management, led by general manager Marwan Kheireddine, undertook a major revamp of the bank’s operations. The bank is currently perceived as one of the few with high standards of efficiency, customer service and reliability, and its network of 12 branches focuses on Beirut’s southeastern suburbs, an area weakly catered for by other banks. Furthermore, the bank’s personalized approach to banking has earned it a favorable word-of-mouth reputation with the middleclass and has a strong Druze customer-base, especially in the Chouf. From a financial standpoint, the bank enjoys a healthy balance sheet. Liquidity levels are high, with cash balances around 35% of total assets, and only 11% invested in Lebanese government treasury bills. Customer loans account for just under 50% of total assets and benefit from a doubtful loans ratio of only 4.5%. The bank has also managed to diversify its income, with interest income accounting for around 56% of the total, and income generated from transactional services (commissions) at around 42%.

Al Mawarid Bank thus comes forward as a bank with modern management systems led by a well-educated management team, a good reputation, attractive geographical presence, healthy financials, high liquidity levels and strong growth.

Jammal Trust Bank

Jammal Trust Bank, ranked number 33 in the banking sector, was established in 1963. The bank was originally established as Investment Bank SAL, and was renamed Jammal Trust Bank in 1971 following its acquisition by Ali Jammal.

The bank is reasonably well established in Lebanon and has four branches in Egypt, a representative office in London, and owns local subsidiaries in real estate investments, trusts, and insurance. It has 20 branches domestically, including in Tripoli, Bint Jbeil and Baalbeck. From a financial standpoint, the bank has a diversified balance sheet, with cash balances of around 25% of total assets. The bank does, however, have a little more exposure to government debt, with Lebanese T-Bills accounting for 35% of total assets. Loans account for around 30% of total assets, with doubtful loans at 7.5% of total facilities. Interest income accounts for around 80% of total income, while commissions account for only 16%. Jammal Trust Bank, therefore, offers an opportunity for institutions looking for new product lines and markets to expand into.

Banque Misr Liban SAL

Banque Misr Liban is one of the oldest banks in Lebanon, registering third on the central bank’s list of banks. The bank, which currently ranks 24th in the sector, was established in 1929, and is majority held by Bank Misr Cairo. While the bank currently has no foreign presence in Egypt, it remains associated with Bank Misr-Cairo, which maintains control of the bank’s management. The bank currently operates a network of 16 branches, evenly spread out throughout the country. The bank’s growth has been stalled in recent years, with little banking activity. Nevertheless, the bank benefits from a high level of liquidity, as cash positions represent in excess of 37% of total assets, while investments in Lebanese government T-Bills account for 48%, with a small loan portfolio. The bank’s sources of funds consist almost exclusively of customer deposits and shareholder equity, with almost no other liabilities whatsoever.

As such, the bank presents to interested parties a clean and liquid balance sheet, which can be leveraged upon to re-launch the institution and use the available funds to transform it into a full-fledged national bank.

Near East Commercial Bank SAL

Near East Commercial Bank seems to be another “dormant” bank in Lebanon. Established in 1979 and currently ranked 41st in the sector, the bank has not witnessed any significant growth in the past few years, despite having many of the characteristics that would allow it to prosper.

The bank also benefits from high levels of liquidity, with cash balances at almost a third of total assets, and investments in short-term Lebanese government T-Bills at 37%. While loans constitute around 29% of total assets, they comprise to a great extent short-term overdraft facilities, while doubtful loans do not exceed 5% of total loans. On the other hand, the bank’s source of funds consists primarily of customer deposits, which are to almost 75% locked in long-term saving accounts, thus providing the bank with a healthy match of assets and liabilities.

As such, the bank is highly liquid, with well-managed assets and liabilities, and consequently an adequate platform to grow both locally and regionally. Interested institutions may also benefit from cooperating with the bank’s existing majority shareholder, Al Wafa Holding, in jointly developing the bank. Societe Nouvelle de la Banque de Syrie et du Liban SAL

After undergoing a wave of restructuring over the past years, which has also included a change of the bank’s corporate identity, and a marketing effort to reposition the bank on the market, the bank’s balance sheet looks improved, with ample liquidity. Cash balances account for almost 30% of the bank’s total assets, in addition to around 53% in short-term liquid government T-Bills. The bank’s loan portfolio accounts for only around 15% of total assets, with doubtful loans at around 13% of the total. Sources of funds consist mostly of long-term customer deposits in saving accounts, in addition to the bank’s equity. While the bank is not witnessing any marked growth, its liquid balance sheet, long-term sources of funds and domestic branch network of 18 branches – provides an adequate platform for expansion. As such, the bank would seem attractive to institutions seeking an already established network, coupled with enough liquidity to aggressively tackle the market.

Creditbank

Creditbank is the result of the merger of Credit Bancaire and Credit Lyonnais-Liban, in 2002. The new bank, ranked at number 26 by total assets, inherited the assets of both banks, along with a team of professionals from Credit Lyonnais-Liban and Credit Lyonnais-France’s operation in Beirut. The bank has been achieving significant growth since its establishment in 2002, not really suffering from any post-merger gap.

Creditbank benefits from a highly liquid balance sheet, with more than 30% of assets held in cash, and another 33% in short-term liquid T-Bills. While the bank’s loan portfolio also constitutes around a third of total assets, doubtful loans do not exceed 6% of total loans, and are adequately provisioned for. The bank’s sources of funds are mainly long-term customer deposits held in savings accounts.

As such, the bank presents potential investors with a clean and liquid balance sheet, a decent branch network, a professional management team, attractive growth, and a clean reputation in the banking sector in Lebanon.

Lebanese Swiss Bank

Lebanese Swiss Bank is a 100% Lebanese bank. Ranked number 28 by total assets, the bank has been undergoing steady growth in the past few years, building upon an evenly distributed branch network of six branches nationwide.

The bank’s balance sheet is highly liquid, with cash balances at almost 40% of total assets and Lebanese T-Bills just over 31%. The bank’s loan portfolio constitutes less than 30% of total assets, of which half is in short-term overdraft accounts. Doubtful loans do not exceed 7%, and are well provisioned for.

Lebanese Swiss Bank presents interested investors with a liquid and clean balance sheet, with a good platform for branch network expansion, and room for growth in the private banking field, in which the bank enjoys a good name.

Middle East & Africa Bank

Middle East and Africa Bank, also a 100% Lebanese bank, is owned by the Hejeij family, which founded the bank following the end of the war in 1991. The bank developed into a decent financial institution, which has continued to undergo growth in recent years. The bank, ranked number 32 by total assets, focuses on Beirut and the southern suburbs, providing corporate and private banking services to its clientele.

The bank enjoys a high level of liquidity, with cash balances at more than 40% of total assets, and short-term Lebanese T-Bills at around 30%. With a loan portfolio of around 20% of total assets, doubtful loans are at less than 6% of total loans, and are almost fully provisioned for consistently. The bank also has a diversified income base, including interest income at 57% of total income, commissions at 25%, and other service-related income at 18%.

The bank provides interested buyers with a good name, a liquid balance sheet and a clean loan portfolio, in addition to a wide range of services that constitutes a platform for development into any specialized type of financial institution.

Federal Bank of Lebanon

Federal Bank of Lebanon is one of the smallest and oldest banks in the country, ranked at number 40 by total assets. Established in 1952, it remains owned and run by the Saab family, covering Beirut and some suburbs with eight branches.

The bank’s balance sheet enjoys a decent level of liquidity, with cash balances at 25% of total assets, and T-Bills at 27%. Loans represent 39% of total assets, but suffer from a doubtful loans ratio of over 26%.

The advantages to a potential buyer would be the family aspect of the bank, which would facilitate potential acquisitions, a decent branch network that can be potentially expanded, and a good level of liquidity on its balance sheet. However, potential buyers should be cautious when reviewing the bank’s loan portfolio.

Banque Lati

Banque Lati has been operational in Lebanon for more than 80 years, and is still held by the Lati family, the bank’s original founders. Nevertheless, the bank was not able to achieve scale, and remains a two-branch bank.

On the other hand, the bank’s balance sheet presents attractive opportunities to potential buyers. Cash and T-Bills represent around 35% of total assets, providing decent levels of liquidity. In addition, the bank’s balance sheet holds a large portfolio of real-estate assets, and one can certainly capitalize on them given the high growth in the real-estate market in Lebanon. In addition, the bank’s doubtful loans remain at less than 8% of the total portfolio, and are fully provisioned for. The bank also has a diversified income base. As such, Banque Lati provides potential investors with a name that has been present in the market for more than 80 years, an attractive balance sheet structure with liquidity and real-estate properties, and a diversified income base.

Nevertheless, it takes much more than a display of attractive features in the sector to entice either local or foreign institutions from undertaking the numerous efforts to invest in or buy out local banks. Large Lebanese banks, which have already completed a number of acquisitions in the past 10 years, are likely to be too busy digesting, or rather integrating, their acquisitions. If a new wave of consolidation is to take place in the market, it is likely to involve banks other than the top five in the country – perhaps the bottom 10 of the alpha and top five of the beta groups. It remains to be seen whether such banks are likely to entertain the possibility of seeking organic growth through acquisitions. Chances are that all bankers are eyeing the market and recent developments – such as the Audi-Saradar merger – are increasing the level of concentration of the industry to previously unseen levels. According to central bank figures, 80% of the sector’s assets are distributed among the top 16 banks. Such a trend would threaten medium-sized banks, which will ultimately seek ways to gain mass to ensure their presence among the giants.

1 Gamma Group: Deposits between $100 million and $300 million

4 Beta Group: Deposits between US$300 million and US$ 1 billion
 

THE BOTTOM END

While Lebanon’s lowest ten banks may look like bargains to potential buyers, they offer little to no investment opportunities, only unwanted baggage

To the untrained eye, the best bargains for those seeking to acquire banks in Lebanon may lie in perhaps the 10 smallest banks in the sector. Such may be the case in other markets, where even the 10 smallest banks may be operational, and may present potential buyers with some value-added in return for the price paid to acquire them. In fact, Lebanon’s bottom 10 banks offer little or no opportunities.

Only three – Banque Pharaon et Chiha, Finance Bank, and Banque Lati – are Lebanese. Only the latter could provide potential buyers with an opportunity, given a clean and liquid balance sheet. As such, a potential buyer would benefit from a banking license without any associated burdens. On the other hand, banks like Finance Bank and Pharaon et Chiha carry unwanted baggage, which would have to be borne by any incoming investor. Banque Pharaon et Chiha’s loan portfolio accounts for more than 30% of total assets. Doubtful loans, however, stand at around 10% of the bank’s total portfolio, while bad loans account for another 10%. In addition, of the bank’s total loan portfolio, more than 88% are in the relatively less liquid commercial loans. Such a ratio does not compare favorably to the Delta group of bank’s loan portfolio composition, where around 50% of total loans are in short-term overdraft accounts, and only 21% in longer-term commercial loans.

The same can be said for Finance Bank, the loan portfolio of which accounts for almost 30% of total assets. In parallel, doubtful loans stand at almost 13% of total loans, while provisions for doubtful loans cover roughly only half that amount. In addition, the bank’s income base is not at all diversified, with more than 95% of the bank’s income coming from interest revenues.

Of the seven foreign banks in the bottom 10, many, like Standard Chartered, Banca di Roma, the Saudi National Commercial Bank, and Bank Saderat Iran are making attempts to make inroads into the domestic market, and as such are not likely to present acquisition opportunities. Others, like Pakistan-based Habib Bank and Iraq-based Rafidain Bank, while not aggressively attempting to increase their market share, have been present in the country as semi-dormant banks since the early 1960s, weathering the war days, and are not likely to bail out now. Arab African International Bank, owned in almost equal shares by the ministry of finance in Kuwait and the central bank of Egypt, is also somewhat of a dormant bank, with neither institution likely to give up their presence in the Lebanese banking market.

Finally, for those who aspire to owning a bank, central bank governor Riad Salameh seldom misses the opportunity to emphasize his support for consolidation in the banking sector, to the extent that the central bank is prepared to extend subsidized credit facilities for banks wanting to acquire others. In yet another effort to improve the consistency and efficiency in the sector, the central bank has been reluctant to issue new banking licenses, having not done so for over 10 years. As such, new entrants to the banking sector in Lebanon must acquire one of the existing licenses, whether local or foreign. Nevertheless, the sale and purchase of such licenses is closely monitored by the central bank. One of the conditions to be met by potential purchasers of banking licenses in Lebanon is a close personal and professional profile of all of the individuals making the purchasing party. Through such a screening process, the central bank ensures that those acquiring a banking license in Lebanon are of a certain caliber, have the proper banking background, and professional expertise to positively contribute to the sector as a whole. Through such control, the central bank was able to conserve the image of the banking sector, at a time when a large number of high net worth individuals are returning to the country with enough funds to cover the price of a banking license.

Tony Hchaime is an investment banker at the Middle East Capital group (MECG)
 

Jerome Bon, professor of marketing at France’s premier Business school ESCP-EAP, has been an ESA intermittent teacher and advisor since the two institutions joined forces with the central bank of Lebanon in 1996. In an interview with EXECUTIVE, Bon talks about the new two-year masters in management program at ESA and ESCP-EAP, set to begin this fall, which he hopes will give students the opportunity live, work and study in France and Lebanon, and work against the dynamic of the brain drain.

Explain the linkage between ESA and ESCP-EAP and how the new masters in management program builds on that relationship.

Bon: ESA was originally created with the help of ESCP-EAP. Most of the courses are delivered here by faculty from ECABAB, exclusively in Lebanon. Now though, we are launching a new joint program – a two-year masters in management for students. In this program, the students will be in a position to spend one year in Lebanon and one year in France. In the final six months of the program Lebanese students at ESA will most likely also study with French students who will come here [to Lebanon] for a semester. Additionally, the students will be registered as students from both institutions and receive a duel masters in management degree from both.

What kind of students are you interested in attracting?

Bon: We are trying to have students who are deeply concerned with the development of their country, but completely aware of the importance of international experience to help their country to develop. We want to see students who want to take advantages of internship opportunities in France or in Europe so that they can get some benchmarks of how it goes in companies in Europe. One of the problems of training is to teach how it goes in real life, being able to benchmark how it goes in different countries. What we think is that education is not only the course content. Education is also a process and the process is what you are living, what you experience during your education period. A lot of what you experience is with the other students so the composition, the mix is something that is very important in the training process.

How does the program fit in with global economic trends?

Bon: It is not that we think the headquarters of companies are more and more composed of people from different companies, companies themselves are increasingly operating in different countries with different cultures so we think we are at a very important point now to offer such programs to students – to enable them to really understand other cultures and be able to work with other cultures. Otherwise you may have a very good knowledge of techniques etc. but your ability to work with other people is very poor.

How would you describe the capacity of Lebanese students?

Bon: This comes back to the real objective of this program – to see whether there are cultural differences in the way that students work and if we can enrich the program through those differences. I would say that there is a very strong oral communication capacity for Lebanese students. They can talk very easily, they can be very convincing and tenacious when they discuss. They may lack some scientific rigor in their reasoning – i.e., not always trying to go deep into a problem to solve it. Maybe they don’t always test the hypothesis that they have in their mind. For example, if I take German students, they go very, very deep into the details. They do not always communicate very easily however. So I think that globally, when you mix people from different countries and when they work in the same group, they will see that in each way, in each culture, while there is not someone who is right or better than the other, they can absorb part of what is good in each culture. This mix is probably better, more compatible, with the ways in which organizations work right now. What we try to do is not to try to develop mimetical cultures. We want people to keep their culture, but to be able to understand and accept other ways of working.

What do you see the new programs role and responsibility, if any, in Lebanon’s on-going exodus of talented individuals?

Bon: This is a question not only for Lebanon. We are working with Morocco and India, for example. We want people to keep their link with their country and to experience a link with other countries. Our objective then is to have a network of people, national people, working in different countries and being well connected so they can develop activities. So through that, our objective is not to [encourage the] “brain drain” so people can work in France. Our objective is for people to know French people, they will know the French system, sufficiently that they will know how to work with France in their future projects. What we want to give them is a knowledge network that will help them to develop activities in Lebanon with France, with Europe, lets say. With a rather tight employment market in Europe right now, a growing number of Moroccans are coming back to Morocco, a growing number of Indians are going back to India, despite lower salaries, because they want to keep on living in their countries. We have done this program precisely to enable students to experience this abroad experience without being kept from the Lebanese environment. So to answer your question, the design of this kind of program is done precisely to keep the contact with the country and to keep them in the country.

How will you judge the success of the program?

Bon: Our final evaluation will be if we have alumnae groups with people from all over the world…. If we want that, then we have to have people stay in their own country. For our school, it is very important. We cannot limit our role to just teaching. We have a responsibility that is more than that. Our customers are not only our students, they are also the countries where we are located. Our success then will also be the success of Lebanon.