The Gulf states may be home to the big dollar merger and acquisition deals but a number of notable transactions occurred elsewhere in the Middle East during 2016.
In particular, Lebanon was a source of activity as local players consolidated their positions in the market, while there were also several exits by regional and international institutions. A changing regulatory environment and the rising costs of doing business are heaping pressure on the country’s smallest banks, with most analysts predicting further consolidation in the coming years.
A shift of strategy
The first significant announcement of 2016 in Lebanon came in March as Egyptian investment bank EFG Hermes announced plans to sell a 40% stake in Lebanese lender Credit Libanais. The deal – executed in June and worth $310m, according to Mergermarket research – saw a consortium of Lebanese and Arab investors acquire the stake. EFG Hermes intends to sell its remaining position in the bank by May 2017.
Karim Awad, group chief executive officer of EFG Hermes, says: “The exit from Credit Libanais had to do with the overall change in the strategic direction of the entire firm. In 2015, we took a decision to shift our strategic focus away from a universal banking model and towards turning EFG Hermes into the premier frontier market’s financial corporation. That shift signalled that we had to part with our stake in the bank, a feat that we were able to accomplish in spite of very difficult conditions in Lebanon.”
Following this deal, Lebanon’s third largest lender, Byblos Bank, announced plans to acquire the operations of Banque Pharaon & Chiha, the oldest bank in the country. Valued at $91m, the transaction forms part of Byblos Bank’s strategy of consolidating its domestic customer deposit base. The acquisition brought Byblos 30,000 accounts and $242m in deposits. Notably, the transaction was assisted by the Lebanese central bank, Banque du Liban (BDL), as part of its effort to encourage greater consolidation of the country's banking sector.
“Although Banque Pharaon & Chiha is small in asset size, the acquisition cost for this financial transaction was largely covered by a central bank soft loan aimed at helping further strengthen the banking sector,” says Semaan Bassil, chairman and general manager of Byblos Bank.
Statements by central bank governor Riad Salameh over the past few years point to BDL’s willingness to spur further consolidation in the sector. The rising costs of compliance and the pressures of operating in a relatively competitive market are taking their toll on the country’s smallest banks. Moving forward, this may present its largest banks, including Byblos, with opportunities for further domestic consolidation.
“As far as Lebanon is concerned, Byblos Bank has looked and will continue to look into further acquisitions if the price adds value to the newly combined entity, although effective diversification can be achieved mainly by going abroad,” says Mr Bassil.
Big bank M&A discouraged
However, the BDL is not promoting mergers among Lebanon’s biggest banks. “Further consolidation among the larger Lebanese banks is not being encouraged by the local regulator at the present time,” says Mr Bassil. “With the top 10 Lebanese banks controlling about 80% of the banking sector’s assets, for the time being the regulator’s focus is instead on consolidation among the country’s 22 other banks.”
In recent years, compliance costs have risen for Lebanese banks as a changing international regulatory environment has eaten away the margins of smaller lenders. While larger, more established banks can shoulder this burden more easily, the trend is having a profound impact on the rest of the banking system.
Alexios Philippides, assistant vice-president at rating agency Moody’s, says: “Overall, I think the trend is towards greater consolidation in Lebanon’s banking sector. Rising compliance costs during a period of subdued economic growth, have made it difficult for some banks to maintain their revenue growth. This is squeezing the bottom line of smaller banks.”
Indeed, as is the case with other markets in the Middle East, Lebanon has fallen victim to the pernicious impact of derisking. Increasingly correspondent banking relationships in some markets and with some banks are being terminated, as international lenders seek to minimise compliance costs by terminating relationships with jurisdictions and business lines they consider to be higher risk. For Lebanon’s smaller banks, this is a problem.
“It’s imperative for banks in Lebanon to have the ability to clear the dollar because the economy is highly dollarised and trends such as derisking are making it increasingly difficult for smaller banks to maintain much-needed correspondent banking relationships,” says Mr Philippides.
Global banks exodus
Meanwhile, the exodus of international banks from the Middle East, including the United Arab Emirates and Jordan, continued in Lebanon in 2016, as HSBC’s in-country unit was sold to Blom Bank.
The deal – expected to be completed in the first half of 2017 – will see HSBC’s three branches and $953m of assets transferred to Blom Bank. The Lebanese lender said the acquisition would help to diversify the bank’s revenue streams and expand its corporate and commercial business in Lebanon.
Today, some of Lebanon’s largest banks now source a large portion of their revenues from overseas operations. But their appetite for further expansion is being tested by the various economic and political headwinds, such as lower oil prices, that continue to buffet the wider Middle East and Africa region.
Over the past few years, Lebanese lenders have bought into Egypt, Turkey and beyond, in their quest for long-term and higher growth opportunities. In the case of Byblos Bank, since 2003 it has spread its global footprint from Sudan and Syria to the Democratic Republic of the Congo. But as it faces various political, security and regulatory challenges, the bank is now revising its overseas expansion strategy.
“Byblos Bank’s strategy abroad traditionally focused on establishing greenfield operations in frontier markets and gradually building strong commercial lending franchises. As some of these countries’ persistent legal, economic and international compliance deficiencies hampered the bank’s activities, our diversification strategy has not been met,” says Mr Bassil.
Eyeing new prospects
Late 2016, Byblos Bank decided to deconsolidate and completely write off its investments in some markets, including Sudan and Syria. But, as Mr Bassil says, it is still considering new prospects outside Lebanon, including in developed markets, and will evaluate any proposition carefully.
“Even in a difficult environment, opportunities may arise, and Byblos Bank continues to look into prospects for value abroad, even in more mature markets, and for acquiring existing operations in these places rather than setting up greenfield operations as has been done in the past,” says Mr Bassil.
Beyond Lebanon, deal activity was far quieter in the Levant. Both the Israeli and Jordanian markets remained relatively calm in 2016, with the structure of both systems unlikely to change in the coming years. This partly reflects the smaller size of their respective markets, but in Jordan’s case it also mirrors the improved profitability metrics recorded by most lenders.
“There is less pressure for consolidation in Jordan. The country has 25 banks but nine of these are foreign owned. Despite the negative impact of the conflict in Iraq and Syria, economic growth remains positive and the profitability of Jordanian banks is still quite stable supported by a net interest margin of 3.5% to 4%, higher than Moody’s median for rated banks in other emerging Middle Eastern and north African markets of about 3%,” says Mr Philippides.
The only aberration in this trend was the sale in early 2017 of a 20% stake in Arab Bank by the Oger Middle East Holding Company, owned by the Hariri family, to a consortium of Jordanian and Arab investors.
