“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.

Middle East Assurance and Reinsurance Co (MEARCO) wants to be a big player in the Lebanese insurance industry. You won’t find it in the top ten Lebanese insurance companies though, at least not as far as total premiums are concerned. Local heavies such as SNA, Libano Suisse, Bankers and Medgulf all took in premiums of more than $12 million last year. MEARCO in comparison is small; written premiums in 1999 were just $1.18 million, not even 10% of the size of the bigger firms.

MEARCO, however, isn’t planning on staying small forever. It plans to grow, and may just do so very quickly. Its premiums already grew by 146%, from $480,000 in 1996 to $1.18 million in 1999. Earnings have also climbed, up 525% from $16,000 in 1997 to an estimated $100,000 in 1999.

Still, these numbers are small. Does MEARCO really have what it takes to become a major player? MEARCO’s plan for quick growth, believe it or not, is to be conservative. A contradiction in terms? In the Lebanese insurance market, not necessarily; conservatism is a sure way of avoiding the pitfalls that felled some major underwriters.

Insurance companies can grow in one of two ways. They can play it fast and dangerous, risking everything by taking any and all premiums that come their way, and even compounding the risk further by selling policies for ridiculously low prices. Unless a company has the necessary financial backbone to resort to such tactics, ALIG did it in 1998, taking in over $10 million in premiums in its first full year of business, ranking tenth in the market, the rewards of such aggressive tactics can be devastating. Some examples are Income Insurance, which folded in 1996, Phoenix, which went belly-up in 1998, and Mesir, which followed in 1999.

The other approach is to be conservative, like MEARCO. The company’s policy is to deal only in the profitable branches of insurance and avoid the high-risk business, offering coverage only where the tendency to leave a profit is greater. For example, MEARCO will not sell you health insurance. Why? They reckon there’s no money in it. “Health insurance has a tendency to leave you with losses,” says Rached Rached, MEARCO’s chairman. This has already been demonstrated by the late Phoenix and Mesir, both of which went heavily into health insurance and paid for it with their companies. MEARCO concentrates on the more profitable general accident portfolio, which includes motor insurance, workmen’s compensation, and construction-related accident insurance among others, constituting 78% of its business in 1999. Fire insurance (16%) and marine insurance (6%) take up the rest.

Further evidence of MEARCO’s approach is that it has no outstanding claims, owing no debts to claimholders. How did they pull that one off? They demand payment of insurance premiums up front; the market’s average collection period is four months, which basically translates into liquidity and funds on hand to pay off any incoming claims. It’s basically a more rigid version of the policy followed by Lebanese United Insurance (LUI), which also has strict terms of payment but with a two-month collection period, see “Getting tough,” January 2000. MEARCO doesn’t waste time paying claims either. Claimholders are usually reimbursed within days of submitting their claims.

But does conservatism lead to market domination? Al-Mashrek Insurance has made a go of it. A short collection period, 45 days for hospitalization insurance, and turning away high-risk business in favor of safer and more profitable portfolios has not only made it a solid player in the Lebanese market, but with its business abroad, perhaps the biggest in the country.

Such examples can also be found within the banking sector in institutions like Banque du Liban et d’Outre-Mer, see “The cool conservatives,” November 1999. Its conservative stance was the very thing that maintained its top position for the past 18 years as far as customer deposits and total assets are concerned, $3.9 billion and $4.6 billion in 1998 respectively. One important reason is because depositors feel safe with a financial institution that doesn’t embrace high-risk ventures, and insurance firms are no different. Insurance firms that shy away from high risks are more apt to remain on solid footing, thus assuring prospective clients that they will indeed be covered should the need arise.

MEARCO has other aces up its sleeve. Its chairman and general manager, Rached Rached, is an old hand at insurance. He was the general manager of Société Nationale d’Assurance (SNA), which is the leading insurance company in Lebanon after American Life, which specializes in life insurance. Most of the company’s 15 shareholders are either brokers or associated with the industry. They have not only brought their very substantial know-how to MEARCO, but also their clients. MEARCO had a ready client base from day one.

The company has plans to expand as well. The first step is to acquire a credit insurance license and provide that service to its clients. Basically a security that guarantees compensation to a debtor in the event that someone defaults on a payment, credit insurance has become a necessity in the Lebanese market. “People want to cover everything sold on credit, from mobile phones to furniture to cars,” says Rached, who expects this to be a very active branch of insurance. His expectations are supported by those of Hassan Harb, LUI’s chairman and general manager, who has just recently acquired the first and only credit license issued since the new law came out, and expects that to greatly improve LUI’s business. Even in this regard, MEARCO is adhering to its conservative stance by looking into the safer and more profitable branches of insurance for further growth.

Another direction in which MEARCO intends to head is toward life insurance. “One option is to acquire a company that already has the life license,” says Rached, since the Ministry of Economy and Trade is no longer issuing new life licenses. American Underwriters Group (AUG) also tried that strategy, acquiring ELKA Insurance for the purpose of getting its life license. “But most probably,” continues Rached, “we will form an alliance with a foreign company for the life insurance branch.” This might be a smart move. Not only would they benefit from that company’s expertise, but the alliance would relieve some of the financial burden and allow for greater liquidity.

Alliances between insurance companies and foreign underwriters have become quite the trend. AXA, the world’s leading insurer, already formed an alliance with Société Libano-Française (SLF), buying 51% of its shares, while Assurance Générale Française (AGF) did the same with Société Nationale d’Assurance (SNA), similarly acquiring 51% of the company’s shares. Most probably this is a strategy the Lebanese market will witness quite often in the coming years.

Is entering the life insurance market worth it? Aline Kamakian, general manager of International Insurance Consultants, seems to think so. “It’s probably the most profitable branch of insurance,” she says, “even more so than fire insurance.” The tendency for life insurance policyholders is to usually cancel after a while, which means the company retains the premiums as pure profit. Since beyond a certain age life insurance policies no longer apply, most life policies become a source of pure income for the insurer, and if invested in sound investment vehicles, the returns could be quite substantial.

MEARCO has the know-how, the tools and the right attitude. What we have to see is how it will use the assets at its disposal. Its conservatism is something to be admired. It helped it to negotiate through the turmoil within the sector while larger firms collapsed, and in the long run, perhaps MEARCO may become one of the country’s major underwriting firms, confirming the old adage about how slow and steady can win the race.

Salim Sfeir, sitting in his modest conference room at the Bank of Beirut’s headquarters, gives the impression of a mild-mannered chairman and general manager, content with where the bank stands. In an interview with EXECUTIVE, he chose his words carefully, and his voice certainly didn’t rock the Richter scale. But don’t be fooled. This is the man who has led one of the fastest growing banks in Lebanon since BoB came about in 1993.

It started small: only five branches with $101 million in assets and earning only $37,000 in its first year of operations. But by the end of 1999, its assets, deposits and profits grew on average by a whopping 62.89%, 78% and 139.5% annually. And there is another positive sign. Last year’s merger with Transorient Bank, which pushed BoB from a medium-sized bank into the top 10, was a successful marriage. The mixing of two corporate cultures and synergies is never easy: more than half of all mergers in the West fail. And BoB did not swallow up Transorient. They were of equal size, both had 14 branches, and must have had differences in business philosophies.

“It was a very good merger,” says Talal Ghali, senior associate at Middle East Capital Group (MECG). “It was successful, smooth; the mixing of the two corporate cultures was good, synergies were fine and it boosted BoB’s growth.” The numbers speak for themselves. Last year, BoB’s earnings jumped 27%, from $14.1 million to $18.1 million. From the 1999 consolidated income statement relative to the 1998 unconsolidated income statement, net interest income jumped 59.7%, and non-interest income soared 138.7%.

Now that the merger is complete, what will the bank be up to this year? The bank is concentrating on what shareholders want to hear: strengthening profitability. “It has been a fixture within the bank,” says Sfeir. “We focus more on profitability than on growth. This is our main strategy.”

Troubleshooting will be one of Sfeir’s tactics this year to continue strong profit growth. “We will be looking at whatever weaknesses we have,” says the chairman. “For profit centers that are not yielding returns, we expect to correct those weaknesses. For example, if there is a branch that is losing money, we’ll focus on it to make it profitable by the end of the year. If there are services that are not making money, we’ll see what the weaknesses are in the department and make it profitable.”

But BoB is doing more than just looking for weaknesses to maintain a steady growth pattern. It just created an asset management department that will run private banking. The private banking arm will be fund-oriented and will operate in a conservative fashion. “We are creating our own funds presently, but mutual funds outside will also be available,” says Sfeir. “It’s more of a capital preservation strategy, rather than a risky approach with a lot of profits on one day and losses on another day. This is why we are focusing on fund management.”

Private banking is not an easy chore; it takes time to develop and convince customers to come on board. But, according to Ghali, “This is an area of growth in Lebanon. There is a huge market for it. Lebanon has a substantial number of high-net-worth individuals.”

Last year, BoB did not emphasize new products and services while it was concentrating on the merger. It already has a strong product base to work from, including savings plans for all ages, an insurance program, Visa and MasterCard credit cards and bill-paying services. BoB also has a capital markets division, providing brokerage services on equities both locally and internationally, plus dealing with Lebanese T-bills on the secondary market. It is heavily involved in trade finance, ranking in the top ten for letters of credit in 1998 before the merger. Since then, its volume has increased considerably, which according to BoB, may have placed it as the leader in the sector.

Although the bank is hesitant to disclose plans for expanding products and services, financial controller and IT manager Sami Saliba offered a few hints. It will expand on its plastics business, especially targeting new clients that use cards more regularly. BoB also plans to launch e-banking this year, see “Virtual piggy bank,” p. 38. Its goal is to offer a full-service Internet package, such as transferring funds, applying for loans, paying bills, trading currencies and checking equity markets.

But one important development that may give a push to BoB’s profitability is its strategic alliance with the Dubai-based Emirates Bank International. One of the Gulf’s leading banks, EBI bought into BoB in 1997, 10%, and the two came up with a scheme that is generating another income stream for the local bank. What do the two banks offer? “All banking activities,” says the chairman. BoB recently changed its slogan to “Banking beyond borders.” This allows an expatriate in the United Arab Emirates to buy a house for his family in Lebanon, transfer money and do trade financing, for example.

A full range of products and services offered through a new channel could boost BoB’s net interest and non-interest income. But there is more. With the economic slowdown, spreads tightening as interest rates drift lower, and the market oversaturated with 65 banks, the heat is on the sector and is creating tough competition. One solution for local banks is to go international, see “Welcome to the real world,” Jan. 2000. Expanding regionally is a start and now is a good time. According to the Economist Intelligence Unit, the economic growth rate in the Middle East will be one of the fastest in the world in 2000, except for Lebanon, which is projected to come in dead last.

“Our relationship with EBI is opening up new markets for Bank of Beirut,” says Sfeir. “It’s helping us penetrate, which is a long-term strategy.” At present, BoB has representatives in several countries in the Middle East. But, says Saliba, “We are concentrating more on regional business; we’ll be more aggressive this year than last.” BoB is also thinking about setting up branches in the region. When is not clear; Sfeir will only say the bank is “assessing the markets.”

BoB’s strategies appear sound, but a question remains. In the midst of a recession that is affecting the entire sector, will the bank be able to report strong earnings in the near future? The first sign of the economic slowdown creeping up on the banks came in 1999. In the first three quarters, the average profit growth for 13 of the top leading banks dropped 3% year-on-year. From the full-year results that came out as EXECUTIVE went to print, Byblos Bank, ranked third by total assets in 1998, reported flat profit growth, and Banque Audi, fourth by total assets, experienced an 11% decrease in earnings. Watch out for Fransabank, Société Générale Libano-Européenne de Banque and Banque Libanaise pour le Commerce results, their third-quarter earnings fell 23.5%, 33.3% and 36.6% respectively.

Although some banks are faring well, BLOM has become the benchmark of how to make money in the face of recession, see “Cool conservatives,” Nov. 1999. Riding through the storm, BLOM’s profits last year jumped 20%, from $58.7 million to $70.4 million.

One of the keys to making it through a recession and strengthening earnings is cost control. BLOM is one of the best in the market. It was able to lower its cost-to-income ratio from 56.8% in 1995 to 38.2% in 1999. BoB is also sensitive to efficiency; its cost-to-income ratio dropped from 64% in 1995, ranked 23rd in the sector, to 42.5%, ranked 4th, in 1998. “This is another fixture of the bank,” says Sfeir. “We always focus on lowering our costs.” According to Saliba, the bank closely watches every penny, even the chairman’s business lunch expenses have to pass through the proper channels.

Yet in 1999, its cost-to-income ratio, excluding non-recurring merger charges, climbed to 46.6%. But, according to Sfeir, the increase can mostly be accounted for by some expenses that came from the merger but were not recorded in accounting for the merger costs. Some examples are upgrading hardware to handle the two systems, redecorating the new branches, and consulting fees. On track with its cost-control obsession, BoB cut the initial swelling of its staff during the merger from 498 to 417 and is aiming to reduce that to 400 by the end of 2000. According to Ghali, BoB’s cost-to-income ratio in 1999 was still far below the average for the sector, estimated at 55% by MECG, and its efficiency will remain a competitive advantage.

BLOM has also mastered pulling in large deposits, even though it has one of the lowest deposit rates. The so-called “BLOM premium” comes down to a customer perception of BLOM as the safest bank. But BoB is also able to have low deposit rates and keep the deposits flowing. In 1999, its average deposit rates fell from 8.7% to 7.5%, a full percentage point lower than the average deposit rate. Nonetheless, BoB’s deposits grew 16.7%, reaching $1.3 billion, last year, despite stiff competition to attract deposits. It was also substantially above MECG’s estimate for the average of the peer group, up 7% to 8%. On the income side, by lowering its deposit rates, BoB’s net interest spread increased from 1.9% in 1998 to 2.6% in 1999.

“Bank of Beirut has established itself with a brand name,” says Ghali. “BLOM has differentiated itself from other banks as the ‘BLOM premium.’ But Bank of Beirut is coming up with the ‘BoB premium.’ It’s visible now, it launched campaigns, it tells you how important it is. Customer service is an indicator of how the brand name is being established; it’s on the right track.”

On the lending side, BLOM is very conservative. Its loan-to-deposit ratio was below 25% in the first half of 1999 while BoB’s ratio stood at 38% at the end of 1999. However, its ratio is below MECG’s calculation for the sector’s average in 1999, up around 50%. BLOM mostly lends to high-net-worth corporate clients. Unlike the sector’s increase in non-performing loans, NPLs, BLOM’s ratio of NPLs to gross loans decreased from 7.3% in 1997 to 6.3% last year. BoB generally targets small- to medium-sized businesses and individuals. That’s a little more risky, but analysts believe that BoB’s risk management department is good at being selective in choosing customers. According to MECG, its ratio of NPLs to gross loans in 1999 came out at about 10%, a drop from around 15% in 1998.

For investors, it may be difficult to speculate on BoB’s share price performance. In the last year-and-a-half, trading volume and stock prices on the Beirut Stock Exchange have tumbled. The BLOM index fell 20.9% in 1999. Following the good price performance of the bank’s shares after it was listed in April 1997, it has leveled off since spring 1998, but avoided the bad showing by most of the shares on the market, see graph.

BoB’s price/earnings, P/E, ratio is in the safe zone, at 13.1, based on 1999 earnings and the share price on January 28. The bank is expected to pay out 25% of its net income in 1999, the same as last year, a 0.12% dividend yield. Its return on average equity increased to 21%, one of the strongest in the sector. However, it is still not known when the BSE will emerge from its torpor. Furthermore, some analysts believe that although its shares are reasonably priced, other banks are cheaper, considering that its P/E ratio is the second highest among listed banks, see chart.

But BoB is generally considered to be a long-term buy. “If somebody wants to buy in Lebanese equities, BoB has to be included. It has been resilient to the downturn of the overall market. It will be paying the same dividends as last year and will continue to pay good dividends,” says Ghali. There is also faith in the management of the company. “They have the management to outperform other banks in terms of bottom line growth,” says Financial Funds Advisors chairman and general manager Jean Riachi. “They proved that hard work counts. Delivering is important to them, and they never miss any loophole anywhere. They never sleep.”

Sfeir’s style of management drives Riachi’s point home. He uses a hands-on approach, close to the dirty work with the rest of the management, and has an open communication policy, wiping out the layers that a manager has to go through to talk with him. And the management usually works from at least 8 a.m. until 8 p.m. As long as Sfeir is omnipresent, there is a good chance that BoB will defy the economic slowdown and show healthy growth in profits.

We recently went on a banking spree at a top foreign bank where we both have accounts. One of us queued behind six people waiting for a teller, which took 15 minutes. At the counter, after watching paper shuffling and stamping, plus signing four documents, the grand total was 25 minutes.

At the same time, the other went looking for her biannual statement, which never materialized. After two clerks thumbed through stacks of statements, a bank officer appeared and announced that the lost statement could be collected several days later. Time: 45 minutes. After the second visit, it will be 45-plus.

One day all this will be taken care of at the click of a mouse. Log on. Click. Check balance and do a transfer. Click, click. Log off.

E-banking has already begun in Lebanon, however modestly. A number of leading banks have taken the plunge with an informative presence online and possible further development in the future. Customers at several banks can sit at home and browse services, order checkbooks and enter the scary world of looking at their account balance. A foreign giant in Lebanon has already trumped local competitors. Banque Nationale de Paris Intercontinentale (BNPI) locally launched BNP Net last September, allowing clients to view exchange rates, stocks and mutual funds and move money from one account to another clickety-click.

But BNPI won’t be alone for long. Right around the corner, savvy Saradar will add transferring funds and ordering credit cards to its virtual menu. Credit Libanais, which is now on a tear in profit growth, up 65.6% year-on-year in the first three quarters of 1999, will soon launch e-banking as well, including moving money and loan applications.

Virtual banking is on its way, but will it be a booming business?

Not overnight. The first argument against it may be the way the Lebanese like to bank. They are used to the human touch inside the brick-and-mortar outlets, which could hinder luring customers to use the cold comfort of hardware. According to James Ross, assistant general manager at Bank of Beirut, the habit of customers walking in to see actual transactions and meet with an officer to discuss credit or products may be hard to break, especially with the older generation. “But Lebanon will gradually adapt. The depersonalized aspect will move upwards, from ATMs to phone banking to e-banking, which will probably crystallize in about three years.”

The number of Internet users is still insignificant compared to Western markets. Data Management’s managing director Maroun Chammas estimates a total of 50,000-80,000 subscribers. Since an account can be used by more than one person, the total number of users is higher. The Professional Computer Association (PCA) estimated a total of 100,000 users last fall, see “Going too low,” November 1999. While that number would be expected to increase at a much faster pace following the price drop for unlimited Internet access last fall, from around $29 to as low as $6.66, IntraCom’s managing director Bahjat el-Darwiche doesn’t think so. He estimates the market growth is 3,000 users per month, or close to 40,000 annually.

One major impediment to the growth of the Internet community is PC sales: The computer market has not caught fire yet. The growth of Internet subscribers is in sync with the PCA’s statistics on PC sales in Lebanon, roughly 40,000 annually.

According to Chammas and Darwiche, prices for PCs are too high in the stagnant Lebanese market. And telephone bills are too steep as well: The cost of a telephone connection is $1.40/hour.

Since it might be difficult to pull customers from branches and there aren’t enough Internet users yet, the younger generation is more likely to embrace e-banking. Darwiche maintains that the potential market for new subscribers is mainly fresh graduates. “They get free access in the universities, so once they graduate they buy a PC and log on. How many students are going to graduate each year? 30,000-40,000. That’s the potential.” And the bankers know it. “If I were a student about to graduate, next year I’d bank on the Internet,” says Andrew Stephens, head of retail banking at Credit Libanais. “They know how to use a PC, they’re not worried that their money is in the ether somewhere. It’s the new generation, and we will target them.”

That’s why some banks recently launched major marketing campaigns offering free Internet access with PC loans. Their target was mainly household clients or, more specifically, students. But these are future clients. The primary goal for e-banking now is to retain existing customers. The Lebanese market is small, around 3.5 million people with about 60% having a bank account, and the market is saturated with financial institutions, 65. “The problem is that you don’t get economies of scale. If I want to operate Internet banking, how many customers am I going to get? 10,000?” says Stephens. “There are 3.5 million people in Lebanon. Let’s say there’s 1 million of them that I can consider as potential clients. They’re not all going to bank with me. Everybody banks with several banks here. Your share of the wallet is small, so it’s a real fight for customers.”

If just a few leading banks do it, customers might migrate. None of the larger banks are going to be left out and risk losing major accounts; expect e-banking to flood the alpha group in no time at all. Carlos Heneine, Saradar’s head of strategic planning and marketing, says, “Lebanese banks are all concerned with serving their own existing customers. That’s what we should do, retain valuable customers. In other words, I have a customer who’s valuable to me, who has a PC, and somebody else offers him Internet service, and he finds it convenient. I can’t afford to lose him.”

If the top banks are the ones that will work with e-banking to keep their customers, what will happen to the smaller ones? If the smaller banks are unable to afford to keep up, we may see the Internet banking wave followed by another wave: mergers. Pressure is already mounting on the smaller banks as the sector is experiencing a decrease in earnings, due to the economic slowdown. Everyone knows that the last thing an owner would want to do is sell his bank. That has been and might continue to hinder a merging trend. But if customers uproot from small banks without e-banking and head for the larger banks, acquisitions will definitely pick up.

Even though many financial institutions will soon take a step from the basic to the intermediary phase in Internet banking, see chart, moving up to full cyber-service is out of reach for now. This is where regulation and security come into play, and the central bank will have a crucial role. The central bank’s attitude about banks offering products and transferring money within the same institution has been laissez-faire. But inter-bank operations online, like moving money from one bank to another, are perceived as living in the danger zone.

“Bigger operations in the future, which will entail higher risk, are in need of full security,” says the head of the information technology department at the central bank, Ali Nahle, who is in charge of setting up safer e-banking. He says it will take two to three months to regulate but two years for security to be implemented.

This will probably delay one of the best markets available. The Lebanese expats, who are in tune with the benefits of riding the tech waves and have accounts in local banks, would jump on the opportunity. “They’re probably more used to banking in those terms, they tend to be more wealthy than the Lebanese here, and if they want to maintain banking facilities in Lebanon, they could easily access us through the Internet,” says Stephens. But without advanced e-banking, they won’t be able to move money overseas.

One of the most blatant benefits of e-banking is efficiency. From Booz-Allen & Hamilton’s study on US banks, the drop in cost per transaction from in-house to Internet services is mind-boggling: $1.08 to $0.13, see graph. No study has taken place in Lebanon, but the US figures prove that e-banking can bring down costs. Yet there is a hitch in the Lebanese system. If there is less shuffling of paper, stamping and posting, downsizing staff is the key to cutting costs. But political and social pressure has made it difficult for businesses to lay off employees.

Still, e-banking could be the tool of the future for retail banking, which is on the upswing among the leading banks, pumping out more products and services at a steady pace.

Picture this: Each time you go to a bank to carry out a transaction, would you be pleasantly surprised if a teller tried to sell you a product over the counter? Intercepted on the way out by a staff member as you’re counting your money? Not likely. Instead, it would be more convenient for customers to see products on the screen after logging on to do some banking at home.

This would be the same for cross-selling products, an important catalyst to see banks increase volume that could help push up non-interest income. “Services and reminders, for example, are much easier to do with Internet banking,” says Stephens. “We can send an email to tell clients when the loan is due and ask if they want another one. If they have a mortgage, we can offer new furniture or a new car. We can talk to them more easily. Call you at home and you’re not there. Maybe a mobile phone, but you’re at a restaurant and you don’t want to talk now. With Internet, bam! You see it, you read it and I’ve got you.”

In the long term, e-banking can take on much more power for retail banks. A recent Booz Allen & Hamilton article explains how: “Using new, analytical, decision support capabilities, customer data can be mined to create predictive models of customer response and behavior.” With a customer profile and keeping track of client behavior, spending habits and activity on their websites, banks can determine who to target with which products.

The full development of e-banking in Lebanon will take time. But over the long haul, there is a good chance that the bank model you see today will change. Banks may get into e-commerce themselves. This is no different than Europe, where banks are creating shopping stores on their websites to get those credit cards rolling.

Joint ventures are an alternative, where the bank cashes in on transactions without having to worry about the web design or marketing side. Credit Libanais has teamed up with Data Management to create NetCommerce, an online shopping mall.

The Internet is also creating brickless banks. European start-ups, usually subsidiaries of brand names, include egg.com, Smile (smile.co.uk), and First-e. With low overhead and only a warehouse to operate from, these banks can offer higher interest rates on savings accounts and lower card rates. Customers can open accounts online, as well as apply for loans and receive a response within minutes, or even go shopping. In the longer term, as boundaries fade, these branchless banks could be a threat to the local industry.

But as banks start getting into this new virtual discovery, whether it pays off or not, customers should benefit the most. Convenience is the name of the game, and if the main focus of banks is to retain clients by offering a better service, luxury will fall into their laps.

Just imagine: At 2:30 a.m. you come home after paying for a big dinner using your debit card, and you know that you need to transfer funds into one account to cover your expenses for the rest of the week. You don’t want to leave your office, sit in Beirut traffic and spend time in the bank’s lobby the next day. Logging on before getting a few hours of shut-eye would do the trick. So the next time you’re stuck in line, ask your branch manager, “Ever heard of Internet banking?”