The hey days of the mid to late 1990s in terms of bank profitability are now over for most Lebanese banks. During that period, local banks were able to create significant interest rate margins between deposits and other funding on the liability side, and loans and government debt securities on the asset side. At that time, yields on government debt securities, whether Eurobonds or Treasury bills, were very high and well exceeded the 10% mark for both Lebanese pound and US dollar denominated fixed income securities, while deposits carried average interest rates (albeit, higher than current levels).
Profitability at Lebanese banks has been on a declining trend for some time, as some banks have slowed down their growth, while others find it extremely difficult to lend to viable and creditworthy companies, individuals or projects, given the deteriorating general operating environment. But the main reason for a depleted profitability is the enforced provisioning by the BDL, which requires a certain percentage of customer deposits to be kept in the form of cash reserves and deposits at the BDL, mostly at an interest rate of 0%.
Interest income still accounts for around
80-90% of total banking income
Since Paris II, when interest rates were brought down to more normal levels, banks have been left cogitating about ways to improve their profitability. Additional provisioning requirements to cover for an increasing level of non-performing loans (as the operating environment is still depressed), subdued loan growth and limited options for low-risk profit-generating investments, and escalating costs for IT investments, the expansion of the branch network, product development and foreign acquisitions, are all factors that have contributed to a slowdown in growth, in addition to the enforced over-liquidity of the balance sheet.
Profitability remains at risk, as Lebanese pound operations (mainly Treasury bills denominated in LBP) are in fact subsidizing US dollar operations. If the Lebanese pound devaluates (the risk still exists), the profitability of Lebanese banks could be wiped out. Moreover, interest income still accounts for around 80%-90% of total banking income and the banks are still at a level where earning diversification is still “under study.” Some banks, particularly the larger ones, have acted more swiftly in the issue of earning diversification by establishing operations abroad and expanding retail activities. This explains the rise in profitability in 2005 for most of the larger banks.
Large banks increase profits
For example, Bank Audi, or the Audi-Saradar group as it is currently named, witnessed an increase in net profits of 48% by year end 2005 to around $106 million. This was due mainly to a rise in commission income and to better profits on financial or treasury operations. Bank Audi’s foreign investments are clearly starting to pay off, and the bank’s recent merger with Egyptian investment banking group, EFG Hermes, bodes well for the future. However, a return on assets (net income divided by total assets) of less than 1% (0.9% in Audi’s case) still shows a very average profitability. Truly profitable banks worldwide usually register ROAs of well above 1% and more in the 2% waters.
Byblos Bank’s performance was similar to Audi’s, in the sense that it too had an ROA of 0.9% at year end 2005. Profit growth was less significant, as net profits grew by 28.5% to $69.3 million. Profits would have been higher were it not for a 157% rise in allocations to loan loss provisions. But the bank was able to more or less compensate with more commission income and financial and treasury operations.
BLOM Bank’s profitability rose significantly by 72.2% for the year ending March 2006, to $44.2 million. However, this profitability could have been higher given the size of Lebanon’s largest bank’s balance sheet and equity base. BLOM is known for its conservative and prudent approach to lending, but nevertheless holds the most important franchise in the country.
On an annualized basis, Banque Libano-Francaise shows an ROA of 0.5%, for an annualized net profit for 2005 of $18.9 million. This bank is still considered to be in a transition phase, as its previous French 51% shareholder, Credit Agricole, sold its stake to regional investors a little bit more than a year ago. The bank is currently going through some changes in management, in culture, and in business philosophy, and significant provisioning is also gradually taking place. BLF should be expected in the medium-term to become increasingly more profitable as its new strategy falls completely into place.
Bank of Beirut, one of the best-managed banks, saw a profit growth slightly below the 10% mark. Its ROA is similar to its peer group at around 0.6%. Net interest income and non-interest income were slightly reduced in 2005, and the rise in net profitability to $28.3 million (unaudited accounts) was mainly due to less allocations to loan loss provisions. Given these figures, one can only feel that the bank is currently optimizing its balance sheet.
The only audited accounts for 2006 came from Crédit Libanais, a traditionally well-managed institution, with state of the art systems, policies and procedures. This bank’s profitability also improved in 2006 by 22% to $23.3 million, which is a step closer to its profitability of $25 million+ during the peak period of 1999-2000. However, ROA remains lower than a standard 1% at 0.7%, reflecting a further need to diversify earnings and invest in some form of product and geographical expansion.
Other high growth banks, such as Intercontinental Bank of Lebanon (IBL) and Lebanese Canadian Bank have witnessed significant growth in profitability in the last few years, which was commensurate with their impressive asset and deposit growth. Although IBL did not publish end of year accounts, its June 2005 figures show an ROA of 1.08% and a 65% net profit growth on an annualized basis. Lebanese Canadian, which had grown substantially in the last five years, is showing signs of profit slow down, as the net income increase dropped to 16.8% in 2005 compared to 65% in 2004.
Profitability depends on stability
As seen above, Lebanese bank profitability would highly depend on the stability of the operating environment, which itself depends on the political situation and the ability of the government to implement an efficient economic recovery and debt repayment plan. Given the socio-political mess of the last few months and the desperate lack of light at the end of a very long tunnel, banks are strongly advised to look elsewhere for profitability.
