“There’s a good chance that Lebanese stocks will jump 40% to 60% if there is a peace agreement this year,” proclaims Philip Khoury, vice president at Merrill Lynch in London. Ask a local broker and he’ll say the same. And we’ve already seen some action. With negotiations almost building up steam, Solidere’s A and B shares jumped 40% from their November 1999 lows through January.

No analyst doubts that Solidere shares will benefit; investors expect more money to come in to gobble up Lebanon’s prime real estate once there is peace, bringing brighter days to the company’s earnings. An increase in Solidere’s shares would lift the entire market as its market cap alone accounts for about 70% of the Beirut Stock Exchange (BSE). Bank shares might follow. “Even though their earnings are not as good as before, price/earnings ratios are at fair levels,” says Jean Riachi, chairman and general manager of Financial Funds Advisors. “You’ll get an increase.”

But once prices reach higher levels and excitement settles down, will peace support stocks for the medium term, pushing prices higher?

Looking at the fundamentals, investors have to consider how much Lebanon’s economy will benefit from peace. According to Marwan Iskandar, a leading economist, the market will get a decent boost from a deal. He believes tourism will improve once Lebanon, Syria and Israel complement each other as destinations. There is a good chance that Lebanon will normalize its economic relations with Israel in a fairly short period, forcing the private sector to become more competitive, and Arab countries will have more freedom to consolidate their economic policies to create a common market. “The most important change will be a boost of confidence. It will give more incentives for foreign investors to come onto the scene in the Middle East, including Lebanon,” says Iskandar.

Others have doubts about how much Lebanon will benefit. Paul Salem, a development and political analyst, thinks many expats will move money back home. “And the agreement could stimulate renewed interest by the US, Europe, and possibly Japan.” But Salem expects foreign direct investment (FDI) to trickle into Lebanon: “This is a very small country; you’re not talking about India or Egypt.”

Ziad Maalouf, vice president at Middle East Capital Group, is wondering if it will even be a trickle. “Why would there be FDI? We have the highest labor cost in the region, the highest price of land, the highest price of raw materials, energy, water and the highest cost of living. Why would anybody want to build a manufacturing plant here?”

Another analyst doubts that Arab nations will liberalize trade. “Harmonizing those relations never got to what it could have been and Israel was not really in that equation. It’s always been politics before economics in the Middle East. They can eventually pull it off, but it will take time.”

As for normalization between Lebanon and Israel, Salem says: “There might be formal clauses related to normalization and trade attached to the peace agreement, but if documents are signed, I don’t think those in Syria and Lebanon will be very open to it, just as we saw in Jordan and Egypt. I’d expect a cold peace at all levels.”

Maalouf draws a parallel between Jordan after peace and what could happen in Lebanon. “Before Jordan signed, you wouldn’t believe how much excitement there was in the market. But stock prices today are close to where they were when peace arrived. The benefits from peace they were hoping for never materialized.” From 1997 to 1999, Jordan’s GDP growth rate dropped from 2.2% to 0.5%. Despite better business opportunities in Lebanon, Maalouf says Jordan was better prepared. “We have to get our house in order.”

Lebanon is in dire need of administrative and fiscal reform. Debt-to-GDP reached 130% at the end of 1999. The deficit was reduced from 43.73% in 1998 to 42.41% in 1999, but missed its target of 40.5%. The Economist Intelligence Unit predicts that Lebanon will have the slowest growth rate in the Middle East this year.

“The peace agreement will not go down to the bottom line right away,” says Salem. “I’m optimistic in a limited, cautious way. You’ll have a country that’s not at war. It’s an essential building block for economic development and important for any investor who’s thinking of investing in Lebanon.”

Investors are still waiting for BSE reform. Riachi says open trading and a regulatory body are essential. “We have to have a real market to see stocks move.” He predicts that after an initial jump in prices, stocks will level off until investors see more positive results. A building block will be a good start, but it’s difficult to predict what will happen after the flurry.

Relative breadth was again very narrow

Perhaps the most influential variable in determining the success or failure of a portfolio manager is the relative breadth of the market. This measure is not the absolute breadth used by technicians, the number of stocks up versus the number of stocks down; it is the percent of the S&P 500 companies that outperform the index. For example, if 300 companies in the S&P 500 outperformed the index in a given year, then the relative breadth would be 60%.

Normally, about 43% of the stocks in the S&P 500 outperform the index during a calendar year, based on data from 1986 to 1999. If we exclude 1998 and 1999, however, that figure rises to 45%. Note that the odds are still skewed against managers. That means that managers had only slightly better than a one-in-four chance of picking an outperforming stock. Multiply those odds by a 25- or 30-stock portfolio, and it becomes quite clear why most managers underperformed in 1998.

In 1999, the relative breadth increased to only 31%. Obviously 1999’s relative breadth was not as narrow as 1998’s, but it was still extraordinarily low. In fact, 1998 and 1999 were the two narrowest years in the last 14 when using our measure of relative breadth.

Little skill needed in 1999 to pick outperforming technology stocks

Although the relative breadth of the overall market was extraordinarily narrow again in 1999, the relative breadth of the Technology sector was extraordinarily high compared to that of various other economic sectors. This means it took very little stock-picking skill to invest in a technology stock that outperformed the S&P 500 during 1999.

Nearly 70% of the stocks in the Technology sector outperformed the S&P 500 during the year. That implies one could have figuratively “thrown a dart” at a universe of Technology stocks to pick a winner for the year, and that the skill needed to pick a winner was relatively small when compared to the skill necessary to pick outperformers in a number of other sectors.

This may explain why there has been a trend among individual investors to shift away from managed funds to self-trading. Individuals have focused primarily on the Technology sector. Our guess is they attribute their success to their superior skill relative to the diversified fund manager rather than to chance. Our guess is also that few compare their performance to Technology indices or Technology funds.

The percent of the companies that outperformed the market in the Basic Industrial sector was the closest to the Technology sector’s, and it was only 51%. Thus, while the probability of picking a stock that outperformed the S&P 500 from the Technology sector was roughly 70%, the best that one could have hoped for in a sector outside of Technology was 50/50.

The probability of picking an outperforming stock was amazingly low in certain sectors. For example, investors looking at Financial or Consumer Cyclical stocks had roughly a four-out-of-five probability of picking up a stock that would underperform the overall market. But investors in Consumer Staples stocks had a 92% probability of picking a loser.

We wrote a report several years ago highlighting that managers were going to have a difficult time outperforming during the second half of the 1990s if the profits cycle continued to decelerate. Market leadership tends to narrow when the profits cycle decelerates because the market becomes extremely “Darwinistic.” Only the fewer and fewer companies that can continue to grow their earnings tend to outperform during such periods, while the performance of the companies whose earnings suffer lags.

That description certainly fits 1998 because the profits cycle decelerated for the fourth straight year. However, that does not help one understand why there was narrow leadership in 1999 because the profits cycle actually re-accelerated. Typically, when that happens, both relative and absolute breadth widen.

We continue to believe that 1999’s narrow leadership was the result of a speculative bubble in the “Nifty 50” and Internet stocks. Both interest rate and earnings fundamentals during the year did not support their outperformance. See “Ignoring the Catalyst,” Quantitative Viewpoint, December 15, 1999. We expect relative breadth to widen in 2000, and expect an increasing number of active managers to outperform their bogeys.

C&Ds and relative strength were the best performers for 1999

If we look at the annual performance of the roughly 45 strategies that we regularly monitor, the best performer for 1999 was our C&D Index, which was up more than 71% for the year. It was the strongest year for lower-quality stocks since 1991, when the C&D Index was up more than 90%.

The second-place finisher for 1999 was our Relative Strength Model, and it was up 64.3%. It should not be surprising to most investors that this particular model performed so well, given the “Nifty 50” environment that was so pervasive during the year.

Third- and fourth-place finishers should also be no surprise: High Five-year Projected Growth (+60.6%) and High Beta (+60.3%). Technology stocks are often characterized as high-growth, high-beta stocks, so it seems natural that these strategies should perform well during a year in which Technology dominated the market’s performance.

The two worst-performing strategies were our A Index and High Dividend Yield. This makes sense given that the A Index typically has the highest dividend yield of any of our proprietary “Quality” Indices. The A Index was down 6.5%, and High Dividend Yield was down 7.7%.

If one negates the “Nifty 50” effect, as our “Quality” Indices do by nature of their equal-weighted construction, then equity market performance in 1999 did indeed reflect that the profits cycle was re-accelerating. Lower-quality stocks handily outperformed higher-quality ones. The constituents of our “Quality” Indices are equal-weighted, and thus, 1999’s “Nifty 50” effect is somewhat negated by their construction, i.e., large-capitalization stocks and small-capitalization stocks have the same influence on the index’s performance.

Thus, our B+ and A- Indices performed relatively poorly despite the fact that many of the “Nifty 50” Technology stocks are contained in those indices.

GARP: growth at a reasonable ridiculous price

The Alpha Surprise Model is a GARP-based, growth at a reasonable price, strategy, and has historically been one of our most popular stock selection strategies. The model has outperformed the S&P 500 ten out of the last 13 years. As a blend of growth and value, it has been able to outperform during “growth” markets and “value” markets.

Given the narrow leadership of the market the past two years, it has become increasingly difficult for our strategy to outperform. It appears that growth at a reasonable price has been replaced by growth at a ridiculous price.

In 1999, our Merrill Lynch vs. Consensus Positive Earnings Surprise Model was up 20.6% compared to the S&P 500, which was up 19.5%. This performance was particularly impressive because we equal-weight the model’s portfolios, and hence the model only had a 31% chance of outperforming the S&P. This model comprises 75% of the Alpha Surprise Model.

The Dividend Discount Model, which comprises the other 25% of the Alpha Surprise Model**,** was up a mere 4.2%. This is not surprising, given that most value-oriented strategies performed poorly during the year.

However, adding just 25% value to an outperforming strategy in a market that does not care about valuation killed the overall Alpha Surprise Model’s performance. The Alpha Surprise Model was up 8.4%, underperforming the S&P 500 by 1,110 basis points.

Further demonstrating the efficacy of our EPS Surprise Model, our Merrill Lynch vs. Consensus Negative Earnings Surprise Model was among our ten worst-performing strategies in 1999. The model was up 3% for the year. However, adding 25% overvaluation or using the bottom S&P 500 companies by Alpha Surprise Model, one would have outperformed our traditional Alpha Surprise Model by 62 basis points.

Searching for overvalued stocks in 1999 appeared to be a good idea. As mentioned, our top-performing strategy last year was our C&D Index. It was up 71.4% and its current portfolio trades at 70 times current-year earnings. Our second-best-performing strategy was our Relative Strength Model. This model was up 64.3% and its portfolio trades at 87 times current-year earnings.

The “Nifty 50” by market capitalization, which we have been underweighting since the end of April, was up 20.1% in 1999 and currently trades at 78 times earnings. In contrast, the “Not-So-Nifty 450” was up only 7.7% in 1999 and trades at a relatively mere 26 times current-year earnings. Based on the performance of our Dividend Discount Model and the “Not-So-Nifty 450,” it actually hurt managers to search for undervalued stocks in 1999. This is an important point for GARP managers who may have underperformed this year.

We expect 2000 to be a better year for active management

As we have repeatedly stated, the more optimistic one is about the rejuvenation and expansion of the global economy, the more one should emphasize active management over passive management of one’s bogey. Active managers have had difficulty outperforming their benchmarks not because they suddenly became idiots, but rather largely because of the global deflation and recession, and the resulting decelerating profits cycles. As stated, market leadership tends to narrow when profits cycles decelerate, and markets become very “Darwinistic.” The narrower the leadership, the lower the probability that an active manager will outperform.

We expect global profits cycles to continue their present upturns. Accordingly, we believe that 2000 will be a better year for active managers. The time to index and constrain tracking error was in 1995. Today, investors should be encouraging managers to deviate from their benchmarks.

SOLIDERE

Solidere’s GDR found itself the beneficiary of positive investor expectations upon news of the planned resumption of peace talks between the Syrians and the Israelis. Even though the real estate giant faced some unnecessary bureaucratic knots, which resulted in delays on its projects, the GDR was buoyed by prospects of peace talks that might generate capital inflows into the real estate sector. The GDR reinforced vital signs of revival as it inched up steadily from December 15’s close of $6.950 to close on January 12 at $8.475, a 21.90% increase in a one-month period.

BLC

On December 23, Banque Libanaise pour le Commerce held a General Assembly to discuss the merger with the United Bank of Lebanon (UBL).

The Assembly revealed a net loss of $4.3m in 1998, well below the $11.7m profit announced earlier and the $15.9m profit in 1997. The discrepancy between the two was the result of a sharp increase of $16.5m in the provisions for doubtful loans to $24.1m. BLC’s GDR had a very volatile month, falling to $13.25, only to rise back again to $13.35 after the turn of the millennium. On January 6, the GDR hit a low of $12.83.

BLOM

In mid-December, Banque du Liban et d’Outre-Mer SAL announced the launch of a new interactive banking voice response system called ALLOBLOM, a 24-hour-a-day service that facilitates banking transactions and information inquiries. BLOM’s GDR was the main highlight of the month: it soared to $28.5 on the back of strong demand supported by sound fundamentals and good value, with a P/E ratio on expected 1999 earnings of 7.33. With the publishing of its full-year 1999 figures, BLOM is expected to further consolidate its position as Lebanon’s most profitable bank.

AUDI

Bank Audi’s announcement that it was to buy back two-thirds of its outstanding GDRs at $20.75 and the Central Bank’s authorization of this plan were two events, the very first of their kind in Lebanon, to promote a certain degree of liquidity and confidence. Audi’s GDR was subject to an initial rise directly after the bank’s announcement. However, soon afterwards, the GDR retreated back to its static price of $20.3 and then managed to inch up just a little to close finally on January 12 at $20.6.

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MOROCCO

Moroccan equities started the new year on a hesitant note, with institutional investors remaining largely on the sidelines. However, investors are looking ahead into the year, when GDP is expected to pick up to around 6% from almost zero growth for 1999. The new five-year plan, recently released by the government**,** is likely to promote more economic diversification, reduce the country’s dependence on the agriculture sector, and tackle the high unemployment level. Achieving higher economic growth will spur more activity on the equity market, while the next phase of the state privatization agenda is likely to boost liquidity levels.

EGYPT

The Egyptian market continued its bull run into the second week of the year, registering further gains on the back of healthy earnings results in the telecom sector and consolidation news in the cement sector. Market leader MobiNil announced that its 1999 fourth quarter (Q4) net profit rose 45% to EGP90.4 million ($26.3 million) from EGP62.5 million in Q3, with full-year results amounting to EGP140.8 million on EGP1.5 billion in revenues. Sentiment on the bourse was also boosted by Suez Cement’s bid to buy a 65% stake in Tora Portland Cement for an amount of EGP1.4 billion, or EGP80 per share. The banking sector was also buoyant, boosted by news that a new law on mortgages was being drafted.

JORDAN

Despite easing monetary policy and lower interest rates on JD deposits, the Amman Stock Exchange continued to suffer from thin liquidity, with prices losing ground in the first two weeks of the year. Equity prices have barely moved since last November, when the market witnessed an extraordinary rise. However, the market is expected to witness an increase in fund flows as valuations reach attractive levels and new privatization deals come to the market. This is expected to be supported by growth in the construction and tourism sectors and new automated trading at the ASE from the second quarter of 2000.

Interest rate differentials between Arab currencies and the dollar on the decline

Historically, there has been a certain spread between domestic and dollar interest rates in Arab countries whose currencies are pegged to the dollar. The spreads fluctuated over time and varied from one country to another depending on economic fundamentals, size of foreign reserves, inflation differential with the US, and markets’ assessment of the risk of devaluation. The availability of such spreads helped preserve the attractiveness of local currencies and provided support to their fixed dollar pegs. Improvement in a country’s economic fundamentals invariably made it possible for the monetary authorities to steer domestic interest rates lower, closer to those on the dollar. However, there is a limit to how much interest rate differentials can be reduced without threatening the fixed dollar peg. A spread is needed to compensate holders of local currency for the higher risk incurred, both actual and perceived, when holding that currency.

Interest rates on the Jordanian dinar (JD) have been maintained at relatively high levels since 1996 to help bolster monetary stability and support the peg to the US dollar that was officially introduced in October 1995 at $1.41 to the JD. However, the slowdown of economic activity in the country, coupled with a strong build-up in foreign reserves, allowed the central bank to shift to an expansionary monetary policy. Rates on three-month certificates of deposit (CDs) assumed a declining trend in 1999, dropping to an average of 6.025% in November, from 9.45% in January. As a result, the differential between three-month Jordanian CDs and three-month US T-bills narrowed from 5.89% in October 1998 to 0.73% in December this year (chart 1). It has become evident now that there is no room left for interest rates on JD deposits to drop further as the spread on US treasuries is now way below the historic 3% level. On the contrary, if, as expected, dollar rates continue to rise, the corresponding JD rates are likely to follow suit.

Interest rates have also been trending lower in Lebanon amidst regained confidence in the Lebanese pound and a noticeable slowdown in economic activity. Rates on three-month Lebanese T-bills declined to 11% by the first week of December last year from an average of 12.7% in 1998, 13.4% in 1997, and 15.2% in 1996. The spread between Lebanese three-month bills and their US counterparts now stands at 5.89%, compared to 7.3% in January 1999 and a high of 20% in September 1995 (chart 2). Not much room is left for short-term interest rates on the Lebanese pound to drop as the spread with corresponding dollar rates is approaching the critical 5% level deemed necessary by market participants to compensate investors for the risk they incur in holding the local currency, given the surging indebtedness of the Lebanese economy.

In Egypt, rates have also followed a downward track over the past few years, albeit at a slower pace than in Lebanon and Jordan. The three-month T-bill rate was lowered from 10.2% in 1996 to 9.8% in 1997, 9.4% in 1998, and 9.1% in June this year. The pressure on the Egyptian pound in the foreign exchange market, particularly in light of the widening external imbalance, saw domestic interest rates edging slightly higher in the past few months. The country’s foreign reserves dropped to $17.5 billion from more than $20 billion at the beginning of the year. If the new government regains credibility in the foreign exchange market and the privatization process picks up momentum, leading to higher levels of foreign direct and portfolio investments, then the spread between Egyptian pound and dollar interest rates has room to tighten further.

Other countries in the region have also witnessed a decline in interest rates. In Morocco, deposit rates dropped from 12.3% in 1994 to 7% by the first week of December 1999. Tunisian rates were down from 8.8% to 5.9% during the same period.

In Gulf countries, domestic interest rates rose in the first quarter of 1999, even though dollar rates were stable. Interest rate differentials between Saudi riyal and dollar deposits rose from a low of 0.35% in January 1998 to a high of 1.95% in March 1999. The widening spreads were a reflection of heightened speculative pressure against the riyal at a time when oil prices were on the decline. With the rise in oil prices later in the year, speculative pressure on the Saudi riyal subsided and by December 1999, Saudi riyal-dollar interest rate differentials shrank to 0.3%. During periods where there is little or no speculation against the Gulf currencies, interest rates on local currency deposits tend to move in tandem with corresponding dollar rates.

Lebanon’s heavies in the banking industry are starting to release their 1999 profits, giving hodgepodge results. Bank of Beirut and Banque du Liban et d’Outre-Mer (BLOM) came out with fine performances, earnings up 27% ($18.1 million) and 20% ($70.4 million) respectively. BLOM proved again that its conservative approach to banking can withstand the pressures of the economic slowdown and the tightening of the spreads as interest rates continue to decline. Along with BLOM’s loan-to-deposit ratio being low, its clients are mostly high-net-worth corps, which has brought its doubtful loans down to 6.27%, one of the lowest in the sector. It also aims well at cost control. From 1995 to 1999, its cost-to-income ratio has dropped from 56.8% to 38.3%, again one of the lowest in the banking industry. Additionally, it has the advantage of having the image of being a very safe bank: It is able to attract customers with low deposit rates, which maintain good deposit growth and a healthy spread.

“We are confident that we will achieve better profits this year,” says BLOM’s general manager Samer Azhari. He claims that BLOM’s track record of withstanding the pressure of economic slowdown and the steady drop in interest rates shows that the bank can continue healthy earnings growth.

But the harsh conditions have affected two leading banks. Byblos Bank ended up with its earnings flat ($49.8 million), while Banque Audi’s profits dropped 11.3% ($38.1 million) last year. Audi’s profit decline comes not only from economic pressure but from its aggressive expansion in retail banking and branch network. Audi opened 13 new branches in 1999, reaching 55, and has plans to open 12 more this year, which will put it way ahead of its competitors. “Audi has a strong management team and will benefit long-term,” says Fidus’ deputy general manager Rudy Sayegh. “But there is a price to pay to be the top innovator in products and services and expand rapidly with branches. This will pay off when the economy recovers, but when the economy improves is unclear.”

Reluctant MPT

The Ministry of Post and Telecommunications (MPT) is now the state’s second-largest source of government revenue after customs taxes, reporting $539 million in returns for 1999, a 37% increase over 1998. Largely responsible for the increase is the MPT’s ban on international calls made over the Internet and the tax hike on cellular calls. International calls increased 99% from 1998, bringing in $124 million, while the ministry collected $109.5 million in dues from international telecom firms.

The MPT also sold 110,000 fixed lines last year and restated its right to issue a third license for a cellular operator in 2002. Other plans for the medium term include setting up an independent telecommunications company, Liban Telecom, which will be 25% privatized. The draft law to create Liban Telecom is still in progress, and as yet the listing of the company’s shares is undecided, as well as whether to list the company’s shares on the Beirut Stock Exchange or sell them to a single strategic investor.

The ministry was also unclear on whether it will maintain management or give it over to the private partner. Says Lebanon Invest’s Nassib Ghobril, “Telecom is one of the government’s biggest revenue generators, so it’s a very sensitive and strategic sector.”

On the other hand, the government has also been slow in privatizing losing operations like Middle East Airlines. An analyst claims that the controversy of privatization is that it would result in layoffs of politically affiliated employees.

Upswing

Solidere can breathe a little more easily in 2000. After making losses of $435,000 for the first six months of 1999, the real estate company scraped into the black by year-end. Solidere’s white knight was Selim Kheireddine, chairman of Al-Mawarid Bank, who authorized the last-minute purchase of land and buildings for a reported $10 million in the Beirut Central District, near the site where Banque Audi’s new head offices are being built.

Solidere shareholders also have something to be happy about. After falling to a low of $6 per share in November, anticipation of a peace settlement pushed up Solidere stock 40% by January 24.

But still in disagreement over compensation terms are former BCD property owners and Solidere. In a development that may hinder the former, the government has closed the Concorde offices in Hamra, where the claimants’ cases were previously assessed before the largest and last properties were evaluated in an attempt to cut costs. “It was costing around $210,000 to keep those offices,” says Muhammad Mugraby, the lawyer handling the cases for the claimants. “The move is mainly in the best interests of the government.”

Meanwhile, Solidere reports that it has completed the final phase of the infrastructure work as well as finishing renovation work on 90% of the old buildings in the downtown area. They are continuing advanced work on the Saifi residential project, which they expect to complete by summer of 2000, disclosing that 35% of the units have already been leased. While all work on the second sea defense wall has been completed, the first is still only halfway done, though Solidere expects to finish it by the coming spring. This will make the reclamation of 608,000 m² of land for office and residential space and another 70,000 m² for a public park possible.

Let it slow, let it slow, let it slow

The Economist Intelligence Unit (EIU) recently forecast that the Middle East and North Africa region will have the second highest growth rate (3.5%) in the world due to the increase in oil prices. Its report on Lebanon, of course, has not been so favorable. EIU’s annual World Outlook report expected the Lebanese economy to grow at a low 0.5% rate this year, up from -1% in 1999, making it the slowest growth rate of any Arab country in 2000. Projected growth rates for other countries include Tunisia at 6.5%, Morocco at 6.3%, Egypt at 5.6%, the United Arab Emirates at 3.5%, Kuwait at 2.8%, Jordan at 2.5%, Syria at 2.3%, and Saudi Arabia at 2%.

In tune with Lebanon’s poor growth rate, the country’s vital statistics don’t look good. Government expenditures in 1999 reached $5.608 billion, with just $3.23 billion in revenues. The result is a budget deficit of 42.41% of expenditure, 2% short of the government-budgeted target but marginally lower than the 1998 deficit of 43.73%. The monthly deficit was 33.14% in December, up from 31.4% in November but down from 62.75% in December 1998. Expenditures increased by 6.92% over the previous year, and revenues by 9.41%. On the flip side, revenues from taxes on income and profit rose by 28% following tax hikes in the budget for 1999, while property tax revenues increased by 55%. The Ministry of Finance maintained that the aggregate revenues from direct taxes were 13.3% above expectations.

The M&A treat

Word has it that Jordan National Bank (JNB) will acquire Bank of Lebanon and Kuwait (BLK), a local bank that is owned by Lebanese and Kuwaiti investors. The acquisition would move JNB, already doing business in Lebanon, up to a medium-sized bank with nine branches and total assets of $200 million after absorbing BLK’s $87 million in total assets, which pulled in $1.2 million in earnings in 1998. If the deal is finalized, JNB, based in Amman, Jordan, will follow London-based Standard Chartered, which purchased a local financial institution just recently. In late 1999, Metropolitan Bank was scooped up by Standard, which bought a 75% stake.

But Schroders corporate finance manager Spiro Youakim says this is not the beginning of a wave of foreign banks buying out locals. He points out that Standard Chartered is simply returning, it left Lebanon in the early 80s, and JNB is enlarging its presence in the country, having already developed familiarity with the market. Most foreign banks that have an interest in Lebanon would like to see economic conditions improve before making an attempt to acquire local banks, adds Youakim.

However, most analysts believe that mergers and acquisitions between local banks will accelerate. Lebanon’s economic slowdown has put pressure on banks’ profits, down 3% on average earnings for the first three quarters among 13 leading banks. Interest rates on the way down and stiff competition in a saturated market have put a squeeze on spreads, also putting a dent in the sector’s profitability. “Small banks will not be able to withstand these conditions for a long time,” says Youakim. He expects small to medium-sized banks to be more open to M&As in 2000, and even though the central bank is against larger financial institutions merging in the near future, banks in the top tier will probably negotiate with each other as well.