S ociete Generate Libano-Europeenne

de Banque (SGLEB) has reportedly

acquired the financially troubled lnaash

Bank in a deal worth $50 million. The

Central Bank had recently taken control of

lnaash after the J affal family relinquished its

84% stake. The bank had allegedly been in

violation of certain lending regulations.

SGLEB, which is half-owned by France’s

Societe Generale, will add 17 branches to its

30-branch network, vastly expanding the

reach of the financial institution and giving

it a presence in the South and Beirut’s

southern suburbs. “They were restricted in

opening new branches so they bought

lnaash,” says one banking analyst. SGLEB

is in an expansion mode. The bank has

moved into the Jordanian market and, a

couple of months ago, it purchased a

majority share of the local brokerage firm

Fidus. SGLEB registered profits of $18

million last year. lnaash had a capital of $10

million, assets worth $356 million and

$290 million in customer deposits in 1999

Safe bet

A rab Bank is planning a regular issue of

Investment Linked Deposits (ILD),

which will be offered with a choice of

indices. The US dollar-based deposits

guarantee that investors will not lose their

capital. The ILDs also, to some extent,

guarantee a certain return on an investor’s

money. The issue of the ILDs follows the

success of an earlier issue by Arab Bank. It

is linked to one or a basket of major

indices. These include the Nikkei 225,

Standard & Poor’s 500, Hang Seng or the

DJ Eurostoxx 50. “Instead of a fixed interest

rate, you get a return based on the

increase in the indices,” says Rim Zanabili,

senior relationship manager at Arab Bank.

“Once a new ILD is opened, clients have

four to six weeks to invest.” The minimum

deposit is $20,000.

Fast mover

A 1-Mawarid has become the first

Lebanese bank since the Israeli

withdrawal to open a branch in the former

occupied zone. The new branch is located

in Hasbaya. It has six employees and

serves a population of around 50,000 people,

including those living in outlying

.1 areas and villages. Only Fransabank –

which has been operating branches in

Marjayoun, Bint Jbeil and Jezzine since the

early ’90s – has had a presence in the

zone. “The next closest bank is at least a

half-hour’s drive away,” says Marwan

Kheireddine, AI-Mawarid’s chairman.

“Most of the local residents are middleclass

employees, so they are the ideal target

market for our retail products.”

Kheireddine is originally from Hasbaya

and his familiarity with the area and many

of the locals who live there helps assure that

he will have a loyal clienl base. The medium-

sized bank had profits of $1.1 million

in 1999, up a full 26.9% from the previous

year. Its assets increased by 32% to $30.19

million. Al-Mawarid has over 40,000

accounts and has extended 17,000 loans, averaging around $2,000 each.

Current accounts

Allied Business Bank (ABB) and

Societe Nationale d’ Assurance (SNA)

have launched a new set of bancassurance

products called H.imaya. The policies were

developed by SNA and will be marketed

exclusively by ABB to its clients. These

include savings-with-insurance plans for

education and retirement benefits as well

some traditional policies. ”We have to keep up

with the worldwide trend that makes it possible

for clients to handle all of their financial

transactions – namely banking, investment

and insurance – at one location, a sort of

financial supermarket,” says Nada Assaf,

ABB’s manager of research and development.

A number of banks in Lebanon have

either started theirown insurance company or

have bought majority shares in established

firms. Banque du Li ban et d’ Outre Mer is one

of Arope’s major shareholders and Byblos

Bank owns ADIR (see pp. 32).

The casino cashes in

Casino du Liban (CCL) saw profits

jump to $5.2 million in the first half of

2000, a 60% increase over the same period

last year. Profits were just $3.6 million in the

first half of 1999. Revenues for the first half

of 2000 totaled $42 million. The casino

saved some $5.4 million by renegotiating

contracts. It is also trying to change the contract

with Abela Development and Tourism

Company and the London Clubs responsible

for running the gaming facilities. But the

casino is not as lucky as it may seem. The

company owes the London Clubs some $5

million and the ministry of finance is

demanding that the casino pay $23 million

in back taxes from slot machine revenues, a

case that is now before the Shura council.

The new Audi

convertible

B anque Audi has launched a new threeyear

convertible bond linked to the

bank’s global depository receipts (GDRs)

and carrying a fixed rate of return. The bonds

are being marketed towards Audi’s retail

depositors. The minimum investment is

$1,000. The paper will offer investors a return

of6%, 7% or8% and are priced at$23.81, $25

and $27.03. Interest is paid semi-annually.

The GDRs’ issue price in 1997 was $27!. This

·marks the second issuance of convertible

bonds in post-war Lebanon. The first ones

were issued by Ciments de Sibline in 1996.

Retail depositors at Audi’s 61 branches will

have the right to exchange the bonds any time

during the paper’s lifetime. Over $75 million

in bonds will be issued. The first tranche, to be

sold in August, is not expected to exceed $30

million. ‘The timing is right because analysts

consider the bank’s GDRs undervalued,” says

Nabil Chaya, head of capital markets at Audi.

Rolling downhill

1999 suffered a drop of 17%. Until the end of

June this year, sales fell 28% compared to the

same period last year. Rymco’s shares,

which are traded on the Beirut Stock

Exchange, have been stagnant, just like the

rest of the stock market. They have

remained at or below $2.50 since the beginning

of the year.

Babv steps

S yria has taken the first steps toward

opening up its state controlled banking

system by granting three Lebanese

banks permission to open branches in the

country’s free trade zones. Societe

Generale Libano-Europeenne de Bank,

Fransabank and Banque Europeenne pour le

Moyen-Orient are allowed to provide banking

services to Syrian companies operating

within the free zones,

provided that each

bank maintains a

minimum currency

capital of $11 million.

But the move is

not likely to result in

any major financial

windfall for the

banks that open in

the zones, says

Maurice Iskander, an

analyst for Thomson

Financial BankWatch.

“There are only

about 700 companies

in the free zones,

most of which already do business with

Lebanese banks,” he says. “Yes, it’s interesting

to set up a bank there. How profitable

it will be, I don ‘t know.” But the

move could be a precursor to much bigger

reforms. The Syrian government is reportedly

studying legislation that will allow foreign

banks to open branches throughout the

country. Last month, Mustapha Miro, the

Syrian prime minister, announced that foreign

banks were welcome in Syria, as long

as they had a local partner. Reforming

Syria’s state controlled economy is

believed to be one of the top priorities of new

president Bashar Al-Assad.

Trade aid

The Arab Trade Finance Program (ATFP)

has extended to Byblos Bank and Credit

Libanais lines of credit worth $20 million

and $10 million respectively, to facilitate

trade transactions with Arab countries. ATFP

had previously granted the Lebanese government

a $40 mill ion loan for the same purpose.

The ATFP has so far granted several

Lebanese financial institutions a total of 37

lines of credit, worth some $251 million. The

Credit Libanais program includes deals to

import crude oi l, which could prove fruitful

should work resume on the refineries. “Loans

wilJ be given at Libor for six months and at

Libor plus 1/8 for one year. But the bank will

add a risk factor of 1 % to 2%, depending on

the project and the client,” says Georges

Khoury, assistant general manager of Credit

Libanais Investment Bank.

Bucking the trend

At a time when most banks are struggling

to maintain profit, Banque

Europeenne pour le Moyen-Orient (BEMO)

has been seeing some healthy earnings.

Profits for the sector dropped 13% in 1999,

but BEMO’s earnings shot up to $2.07 for the

first half of 2000, a full 18.7% increase

compared to the same period last year.

Customer deposits climbed 35% and total

assets increased 28.8%. While most

Lebanese banks are reducing the amount of

money they lend to private sector companies,

BEMO increased its lending 31 .4%.

“BEMO’s performance is obviously working

against the tide in the banking sector,” says

Nicolas Sawan, head of trading at Lebanon

Invest. The bank is also bucking the trend at

the Beirut Stock Exchange. While there is little

activity on the market, BEMO’s shares

climbed 8% last month, to $3.25.

Y ou don’t have to pick up a copy of

the National Enquirer to know

that insurance firms are going to

bed with banks these days. The megamerger

of Citicorp and Travelers Insurance

Group created the $700 billion giant

Citigroup almost two years ago, and

helped precipitate the blurring of lines in the

US financial sector – a trend that was

already well established in Europe.

France-based insurer Axa, for example,

has an asset management portfolio of $700

billion, making it the fourth-largest money manager after Union Bank of Switzerland,

Fidelity and Credit Suisse.

Here in Lebanon, the business of banks and

insurance companies is also coming closer

together, albeit on a smaller scale. “It’s the

future. People are looking for a one-stop

shop, and banks are creating a sort of financial

supermarket,” says William Salem,

head of marketing for SNA, the first insurance

firm to start selling insurance in banks.

SNA has created a worldwide group accident

policy, which it sells to banks, and has

developed a complete line of retail insurance

products that are sold at Banque Audi and

BBAC, both shareholders in SNA.

At least ten banks have started their own

insurance companies while others are buying

into existing insurers. Banque du Liban

et d’Outre Mer is a major shareholder in

Arope; Byblos Bank owns all of ADIR;

Banque Audi has a I 0% stake in Societe

Nationale d’ Assurance (SNA) and is finalizing

its recent acquisition ofLibanoArabe.

So what do these profit-driven partners get

out of this love affair? Insurers are the first to

benefit. Banks throw a constant stream of

business their way. Insurance companies

that are owned by banks are guaranteed captive

business. Before granting a loan, a bank

usually requires a client to purchase one or

more policies. These policies virtually

ensure that a bank will get back its money. A

personal loan is accompanied by life or disability

insurance. Car loans must come with

automobile insurance. A housing loan generally

comes with life insurance as well as fire

or natural disaster policies. “This is our

bread and butter,” says Fateh Bekdache,

general manager of Arope insurance.

“Everyday the bank’s branches are open, I’m getting cash business,” he adds. In 1999,

at least a third of Arope’s $5.5 million portfolio

was captive business, policies that

BLOM clients were required to buy.

Most of the insurance pobcies that are

sold through banks, such as life, fire and

marine, are the most profitable forms of

coverage. At least half of ADIR’s $5.2 million

portfolio in 1999 was in life, and the

firm’s earnings were $1.6 million.

Insurance companies that rely on banks for

business are also able to lessen their

reliance on the volatile and high-risk market

for medical coverage. “We’re not interested

in hospitalization,” says Jean Hleiss, general

manager of ADIR. “Others are building

their market share on [hospitalization] and

that’s why they are losing.” But medical

policies account for 33% of Arope’s business.

Although a third of that is BLOM’s medical group, the insurer’s heavy reliance

on health coverage has taken its toll on

profits. Out of $5.5 million in revenues in

1999, earnings were less than $475,000.

Insurers receiving captive business from

banks do away with long collection periods

and receivables. Collection problems have

contributed to the collapse of more than one

insurance firm. With banks, all payments are

made in cash. The insurer has no receivables.

At least 80% of ADIR’s portfolio comes

from Byblos Bank, which pays upfront.

“When BLOM issues a loan, they take the

money for the insurance from the customer

and give it to me,” says Bekdache. “We get

paid ahead and the balance is always zero.”

And by relying on a bank for business,

there are no broker’s charges. ”The commission

rates in our business are very high,”

says Bekdache. “I don’t have to pay that for

business coming from the bank.” Many brokers

are not reliable payers. They tend to

demand extended payment terms for clients

and, says Joseph Issa, lawyer for Middle

East Assurance and Reinsurance Company,

“some brokers don’t pass on everything

they collect from the clients. They pay the

money they’ve collected in parts even

though the client has paid up.” At the same

time, brokers often transfer portfolios from

one company to another every time they

find a better deal. “If you depend on a broker

who has a very large portfolio and he

decides to leave, you have a problem,” says

Bekdache. Arope has already reduced its

broker-based business from 33% of its total

sales to less than 20%.

The banks also benefit from the relationship

by getting a share in the profits. Byblos

Bank is entitled to the $1.6 million in earnings

made by ADIR. BLOM gets 90% of Arope’s profits. “We look at it as an investment,

a diversification of the bank’s products,

which leads to additional profits,”

says Faisal Nsouli, head of research and

development at Byblos Bank. “We rely

heavily on life and homeowner policies.

Having a bank-owned insurance company is

more efficient and more reliable.” At the

same time, banks are able to tailor insurance

products for their clients. A fi vi::-year pt::rsonal

loan can be guaranteed by a life insurance

policy for the same period.

But there are downsides to the bank-insurance

company connection. An insurer that

depends solely on a bank to provide it with

business is restricting its own growth. And in

the insurance business, as your portfolio

grows, your risk diminishes. “It’s not healthy

to depend on the bank all the time,” says

Bekdache. “Direct business will generate

more for you.” About a third of Arope’s total

revenues, or $1.8 million, came from direct

sales in 1999. ADIR is also considering stepping

out of Byblos Bank’s shadow and

expanding into direct sales. “We are seeking

to increase our market share as well as

exploring new markets,” says Hleiss.

There are those who believe that this type of

marriage between banks and insurers denies

consumers the basic right to choose to do

business with another insurance company.

”Banks are actually pushing clients to buy

insurance from companies, which are either

theirs, or with which they have made

arrangements,” says Abraham Matossian,

chairman of Al-Mashrek. “It’s a package deal

and the client cannot refuse. Bancassurance is

important abroad, but the client is not obliged

to accept what the bank offers. He can either

accept what’s offered or go with another

insurer. Here there is no choice.”

T he rating agency just won’t quit. Two

months ago Standard & Poor’s

(S&P) threatened that if the government

didn’t do something about fiscal problems

running wild, Lebanon would be downgraded

later this year. S&P’s latest incoming

targeted the country’s most cherished sectorthe

banks. Rest assured: The recent warning

did not highlight problems within the banks.

Whether or not the government heeds S&P’s

earlier signal will determine to a great extent

the problems that banks may face.

The agency went after financial systems

around the world that are vulnerable or

already tasting deterioration of credit quality.

If, by chance, defaulting on loan payments

reaches critical mass, banks could experience

a credit bust. Out of 15 banking systems

cited by S&P, US banks’ credit exposure

could be hit if the booming economy comes

to an end with a hard landing. Japanese banks

cannot prosper as the country’s recovery

from its financial crisis a decade ago is moving

slowly. Lebanese banks, on the other hand, are operating

in a feeble

economy and if it’s

not resuscitated in the

near future, loan portfolios could be in jeopardy.

“Lebanon is a special case,” says

Navaid Farooq, S&P’s sovereign analyst for

the Middle East and North Africa. “It’s about

macroeconomic conditions. We’re not concerned

about the banks themselves as much as

the environment they operate in, which is

riskier due to the government’s severe fiscal

imbalances.”

Relying on a rescue team to pull the

economy out of its dismal state is in question.

The administration, in office for two

years, put together a fivt:-year plan that

included lowering the debt, correcting fiscal

imbalances and stimulating growth.

Instead, it let debt to GDP climb from

118% at the end of 1998 to 140%. In the first

half of 2000, the budget deficit reached

53%, way above this year’s target of

37.3%. Economist Intelligence Unit reports that GDP growth fell to – l % in

1999 and predicts only 0.5% this year.

Right now there is a glimmer of hope that the

elections will bring in a new government able

to repair the crippled market. But the next government

has little room to maneuver. After debt

servicing and salaries and wages, the government

can only play with about 15% of its

expenditures – something they can’t reduce

since it’s their meager contribution to growth.

Raising taxes again to increase revenue

would bury the economy even further.

Many analysts believe emergency action

must be taken. ”The most important thing is

for the government to get money today,”

says Marwan Barakat, head of research at

Banque Audi. “It must relieve debt and debt

servicing as soon as possible.” He suggests

selling mobile phone licenses – $2. 7 billion

was lost when the government rejected offers from LibanCell and Cellis – and

picking up the pace on privatization. But

once a new government settles in, it might

be too late to make an impact this year. And

some wonder whether any Lebanese

administration can unite and generate political

will to implement solution~ “I don’t pin

any hopes on anybody anymore,” say~ um: analyst.

“We have to be realistic:

All government

policies will be dictated

by political interests, not

political will.”

On the upside, unlike the

wayward government,

most banks have the discipline

to prepare for the

worst. “Most of the banks

are low on lending compared

to other countries,

which gives them a lot of fat,” says Andrew Stephens, head of retail at

Credit Libanais. “And most have significant

assets in Lebanese T-bills. The banks do not

face deep problems.” By the end of June, the

loan-to-deposit ratio for the sector was 42%.

And expecting hard times, banks have

become less generous handing out money.

Loan growth fell from 20.5% in 1998 to

12.7% last year. Lending up to the end of June

increased only 3.7%. The banks are also high

on liquidity: Liquid assets to total assets

stood at 68% in the first half of 2000.

Creating a cushion using conservative tactics

makes it unlikely for numerous banks to

fall if defaulting on loans accelerates. “The

banks will get into problems only if they stop

lending prudently and start lending outside

certain banking criteria, as a couple of them

have done,” says Stephens. One case was

Inaash Bank. Found with bad loans and

fishy lending in violation of regulations, the

central bank stepped in and sold it to Societe

Generale Libano-Europeenne de Banque.

If obituaries are rare, one area will be difficult

to defend: profits. “Not many banks will

fail in the near future,” says Bassam

Yammine, senior manager of corporate

finance at Lebanon Invest. “Banks have

enough ammunition, especially the large

ones, to continue. I’m worrying mostly about

the bottom line.” There have already been

attacks on banks’ earnings. Spreads have been pinched in recent years. With interest

rates on two-year government paper falling to

14%, stiff competition has kept deposit rates

up (around 12% on LBPdeposits). The economic

slowdown has put pressure on growth

in deposits and assets. An increase in deposits

fell from 20% in 1998 to 11 % last year. Nonperforming

loans are now starting to move up.

Doubtful loans to gross

loans inched up to 14%

last year from 13.75% in

1998. In June, they

climbed to 15.1 %.

After profits dropped 13%

for the sector in 1999 – a

blow after 40% average

annual profit growth

between 1993 and 1998 -many predict that earnings

will experience a similar fall this year. “Now adding

deterioration of asset quality and an increase

in provisioning to revenue stagnation and

tight spreads, profits will drop between 15%

to 20% this year,” says Yanunine.

Finding solutions for the banks to generate

better earnings will not be easy. Banks are still

heavily investing on a safe bet: Thirty-five percent

of assets are in T-bills. But with the

spreads in a vice and the option of increasing

lending to the private sector with higher

yields a no-no for now, the banks are in a catch

22. “With the loan ratio this low, banks cannot

make up the thin spreads on lending,” says

Stephens. “That’s about it for the bottom

line.” Banks have been moving more into

retail banking to help beef up non-interest

income. “It’s important for the banks to move

into products and services as profitable activities,”

says Haroutiun Samuelian, vice governor

at the central bank. “In the early ’80s,

non-interest income for US banks took up

20% of their revenues. Now it’s a 50/50 split

between interest and non-interest income.” But

retail banking has yet to pay off. It requires

high volume, which is difficult in a small

market, while other non-interest tools, like letters

of credit, have been pulled down with the

recession, damaging gains coming from new

products and services to make a difference.

As in any sector, downtime means lowering

costs. “Banks must focus on restructuring,

cleaning up, cost cutting,” says Yammine.

Banque du Liban et d’Outre-Mer, Lebanon’s

largest bank and one that is still enjoying

healthy profit growth, is not only conservative

in lending but has focused on reducing

expenses. Its cost-to-income ratio dropped to

34.7% after the first six months this year

from 38.4% at the end of 1999. But other

majors more aggressive expanding on retail

find it more difficult to contain costs. Banque

Audi’s and Byblos Bank’s cost-to-income

ratios have moved up this year. ”The human

cost is already low compared to other countries.

Plus, many banks, out of necessity, are

investing in new services which all have

costs,” says Stephens.

If economic agony is prolonged, the pace of

mergers and acquisitions may pick up-especially

small and medium-sized banks swallowed

up by larger ones. Out of the 63 banks

operating in the country, the top 20 carry the

most muscle. Over 90% of total profits are in

the top tier, which leaves less room for the rest

of the banks’ earnings to fall. “With consolidation,

economies of scale can help,” says

Samuelian. ”The sound ones will survive

while the weak ones will not.”

Going abroad would help. But up to now

Lebanese banks have been hesitant to fan

out across the region. This could change.

Syria, with a state-owned, dilapidated banking

system, is opening up. It just established

free-trade zones and three Lebanese banks got

the green light. The problem is having to wait

for the entire Syrian market to open up.

“Syria is the place,” says Stephens, “but not

tomorrow. Maybe the day after tomorrow.”

What’s more certain is that if banks

remain mostly entrenched in the Lebanese

market and the economy continues to falter,

it may take time for them to see glory days

in profit growth again.