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.

SLOW MOVERS? Some shop owners say the project has taken far too long

Despite experiencing a drop in sales revenues of up to 40%, Hamra retailers are confident that the on-going construction work and facelift will eventually help Hamra become a thriving retail area, serving Ras Beirut’s middle-market catchment.

After nearly one year of road works, the rehabilitation of Hamra Street is nearly complete. Roads have been asphalted and paved, pavements widened, trees planted and the colorful overhead jungle of electricity wires has been buried underground. The renovation effort is part of a $12 million project to rehabilitate five major streets in Beirut (including Corniche al Nahr, Monot Street and Barbour) and paid for by the Arab Fund for Economic and Social Rehabilitation. The Council for Development and Reconstruction (CDR) had earlier appointed Dar al Handasah Nazih Taleb & Partners to design a new Street.

However, while most shopkeepers praise efforts to upgrade what was once Lebanon’s main shopping boulevard, a few claim that the project has taken too long to complete, resulting in a loss of revenues of between 15% and 40%.

“Of course we have had less customers,” said Hala Shaftary, store manager of Librarie Antoine. “For months Hamra was hardly accessible. On days when they were working in front of the shop, we hardly saw any customers. But I think we suffered less than others, as we have a lot of regular clients.” According to Librarie Antoine’s general sales manager, Emile Tyan, the 40-year-old Hamra store is the best performing of the chain’s ten outlets. He estimated a loss in sales of 15%. Elsewhere, Mohamed Bushnak, manager of Starbucks Hamra, the American coffee chain’s first branch to open in Lebanon, estimated a loss of up to 20%, blaming the lack of parking.

Ghassan Mahfouz, managing owner of Marilou Women’s Wear, estimated his losses to be some 35%. However, he did not to place all the blame for bad sales figures at the government’s doorstep. “Business has been going down since 1997, ” he shrugged. “Business was good until then,” he said, “then it went down by some 20% a year. We are in a recession and the middle class is suffering.” Some retailers are less forgiving. Most volatile among Hamra’s retailers is Georges Moujaess, who founded Roi Des Frites in 1967. The snack bar is one of the most famous fast food outlets on Hamra and is normally open till the early hours of the morning. The construction work forced Moujaess to a hang a banner reading “The King is off due to works,” in front of his closed facade for the two months he was forced to close. The closure cost him $60,000, while overall business has been hit by the lack of pedestrian traffic.

Moujaess blamed the contractors for the delay, claiming they worked slowly to earn more money and that the whole project had been flawed from the start. “They dug up the road twice. First they did the sewage and water and then they closed it. The next month they opened it again to fix the electricity.”

Aynan Bassam, secretary of the Hamra Traders Association (HTA) sympathizes but does not agree with all the complaints. He estimated the average losses of Hamra’s shopkeepers not to exceed 15%, while according to him the project has been largely executed according to plan. Currently, most of Hamra Street is open again to traffic and heavy works are only taking place in front of Hamra Cinema. The project will be completed when the Fransabank building is reached.

“The project started on May 12 and is due to be finished on June 31, which it will be,” said Bassam, who owns Al Bassam, a 650m2 ladies fashion and lingerie store in the heart of Hamra. “The contractor gave us a choice,” Bassam said. “Either to execute the works fast, which would mean the area would remain closed for several months or to do it in stages. We chose the latter.”

The main work was carried out to replace 2,000m of Hamra’s 50-year-old drainage and sewage system, which was dealing with waste and rainwater with one 6-inch pipe, which, in heavy winter rain, would flood, creating a terrible stench. Now, two wider and separate pipes take care of the effluents. The project is in anticipation of the completion of the wastewater treatment plants being built in Ouzai and Dora. The South for Construction’s project manager, Rabiah Dejhaim, said traffic would return to normal by the end of June and admitted that work may have seemed to drag on, but said this was due to special seasonal requests. “It was the HTA and others who asked us not to work during Christmas and the February shopping festival,” he said. “That’s why we closed and opened the street again, and had to ask for an extra $2 million for the total of five streets.”

Still the reality is that business suffered and it wasn’t just the shops. Crowne Plaza’s Sales Manager Ziad Bassila estimated a 30% lower occupancy rate, which increased when the heavy machines reached the hotel entrance. Najib Nasser, manager of the Plaza Hotel, said: “we suffered like anyone else, as for three months we hardly had any customers.” He was nonetheless realistic about the situation. “I don’t like to point fingers,” he said. “Hamra Street is much better now. Let’s hope it will only get better in the future.”

It should. Before the war, Hamra was everything Beirut stood for. It was not just the city’s high-end shopping street, but also a place to go out and have fun. Hamra boasted no less than ten cinemas, and a string of cafes and clubs. Those who have cited the demise of the Modca Café (rented to the Vero Moda chain for $20,000 a month) as the final nail in Hamra’s cultural coffin have missed the point. The street is prime retail with rents that have still to reflect its potential. Bassam, who can remember the so-called good old days, is convinced Hamra will get back on its feet. To him, the rehabilitation of Hamra Street is but a first step. His dream is to see it turned into a pedestrian zone.

The retail experts point to the thorny issue of old rents as a factor that held up Hamra’s post-war development. “The biggest problem facing Hamra after the war was the large number of displaced people who lived in the many empty buildings,” said Raja Makarem, managing partner of Ramco Real Estate Advisers. “This gave the area a shabby, insecure feel.”

Today, the squatters have mostly left and Makarem believes that Hamra has all it takes to become a genuine highstreet and the retail backbone of the area. Crucially, he does not see either Verdun, downtown or the rise of shopping mall culture as a major threat.

According to Makarem, Hamra is affordable. Today, the average rent for new retail space is between $500-$600 per m2 a year. At Hamra’s more affordable poles, rent is even cheaper, with shops at the Sadat Street junction offered for a mere $300 per m2 a year. And it has a social fabric. “Someone coming from the mountains to Beirut will not feel comfortable in downtown, where he can’t even pay for a coffee,” said Makarem, who lives in Hamra. “Hamra is the only place that still has the fabric of old Beirut, a place where rich and poor, Christians and Muslims can meet. What used to be downtown before the war will become Hamra: the melting pot of Lebanon.”

Cliché or not, he has a point. It is a target rich environment, serving the area’s relatively affluent community, a significant percentage of whom work in or attend the Lebanese American University, the American University of Beirut and the Law Faculty of the Lebanese University. It is also close to the beach and the Downtown.

Hamra measures some 2 km2, hosting 1,000 retail outlets, 500 companies, two main hospitals, several smaller ones, 450 private clinics, 65 banks and 24 hotels, among which are the Commodore Le Meridiene, Crown Plaza and the nearby Gefinor Rotana. It has a population of 20,000 and this does not include the 13,000 students and 22,000 employees. The area has an estimated 100,000 visitors a day.

“I’ve got high hopes for Hamra,” said Makarem. “With the new city center and Verdun both targeting the upper segments of the market, Hamra is giving a chance to reposition in the middle market segment. This would entail a gradual upgrade of the street’s merchandising, and this is exactly what seems to be happening after an initial shift to the lower end of the market with the likes of Eldorado, Akil and Big Bros.”

Innovation has helped. Hamra’s cinemas although beautiful, remain unrestored since the 1970s and are not in touch with modern cinema-going trends, which dictate a ‘more screens for less seats’ policy. Today, following a $2 million renovation, the old Eldorado cinema earns its owners an annual rent of $250,000, as a 4-storey budget “department store” and one of the street’s best performers. However, the trend is mainly heading up-market and in 2003, many new outlets such as Vero Moda, Jack & Jones, Dunkin Donuts, La Senza and Librarie Orientale have opened in Hamra Street. However, apart from the Crowne Plaza much of the Taj Tower’s 5,000 m2 retail remains unoccupied.

“Of course, we have been affected by the works,” said Taj Tower owner Omar Ramadan, who is asking for an average of $625 per m2 a year for his new shops. “But we’re also in the process of refurbishing the building, as we separate the entrances of hotel and mall. Now that the street is finished we hope things will get better.”