Despite difficult global conditions, Lebanese banks enjoyed bumper years in 2009 and 2010, producing record growth in assets, deposits and profits in 2010 and strong overall performances. With a huge growth in lending contributing to 8% economic growth in 2010 and an expansion in overseas operations, the banks looked set to continue the trend in 2011. However, the political upheaval in the Middle East and north Africa (MENA), as well as an uncertain political situation at home, has taken some of the shine off Lebanon's positive outlook.
Nevertheless, despite the vagaries of internal and regional politics, confidence in Lebanon’s well-regulated banking sector continues apace. Even accusations of money laundering against the Lebanese Canadian Bank (LCB) in February by the US Treasury, which could have been highly damaging, have been defused by quick action from the central bank, Banque du Liban. This resulted in LCB's agreed merger with another Lebanese bank, Société Générale de Banque au Liban. Banque du Liban's governor, Riad Salameh, says that other Lebanese banks were not affected by the LCB incident and that confidence in the Lebanese banking sector has not been shaken (see interview with Mr Salameh and box for this article).
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In 2010, Lebanon's banking sector maintained its robust performance by remaining profitable, highly liquid and well capitalised. The Banque du Liban states: “Banks in Lebanon have clean balance sheets as the central bank has forbidden them from making subprime investments since 2004. Bank deposits, which grew by 10% on an annual basis, have exceeded $110bn at end 2010. Lebanon has attracted the largest share of bank deposits in the [MENA] region in 2010. Despite global credit tightening, credit to the private sector has reached an historic level of $36bn in 2010, recording a growth rate of about 22%, which is the highest in the region.
“The average capital adequacy ratio of banks in Lebanon has exceeded 12%, with banks fully abiding by Basel II standards. As a matter of fact, Lebanese banks have a high level of liquidity and the structure and quality of their capital is generally in line with the outlook of the Basel III standards.”
Alpha banks
While the total number of banks operating in Lebanon is 66, according to the Banking Control Commission, made up of 47 commercial banks, 14 investment banks and five Islamic banks, the bulk of the banking activity in the country is accounted for by the 13 largest institutions, known as 'alpha banks', which dominate the sector and performed well in 2010.
The 13 alpha banks, according to Bankdata Financial Services, reported asset growth of 11.2% in 2010, driven by customer deposit growth of 12.3% and net profit growth of 24%. The moderate growth in deposits was seen in the context of an 18% decline of capital inflows from the record high levels of 2009. The key change for these banks was the unprecedented growth in bank loans, which went up by 25.7% in 2010. This was driven by enticing measures from the central bank supporting Lebanese pound lending, which grew by 62%, while foreign currency lending grew by 21%. As such, loans to deposits rose from 28.8% at end 2009 to 32.3% at end 2010.
The rise in bank lending helped sustain alpha bank spreads, which managed to rise by six basis points to 1.98% in 2010, with banks’ policies focused on decreasing their cost of funding on the one hand and extending lending exposures in a growing domestic economy on the other. The banks reported an annual interest margin growth of 20% for the year as a result of rising spreads and increased activity.
Lebanon's banking sector’s strength and soundness was foreshadowed in the International Monetary Fund’s Article IV consultation in July 2010: “Lebanon’s banks have weathered the global crisis well, thanks to relatively conservative funding and asset structures, which reflect prudent banking regulation and supervision. Supported by the strong economy, the banking system remains profitable and well-capitalised, highly liquid and exhibits low and still falling NPL [non-performing loan] ratios.”
The IMF report, highlighting the trend towards greater local lending, added: “Exposure to Dubai was very limited, and is virtually non-existent with regards to southern Europe. However, falling interest rates are putting pressure on bank profits, challenging the traditional business model that relied on intermediation of private deposits to the government and the Banque du Liban. Banks are responding by seeking new growth opportunities outside of Lebanon and expanding domestic credit to the private sector.”
Lebanon's big three
After the exceptional years of 2008 and 2009, Lebanese banks still managed to show solid results in 2010 and their achievements are exemplified by the three largest banks, Bank Audi, Blom Bank and Byblos Bank, which all showed continued achievements. The combined profits of these three banks reached $861.3m in 2010, an increase of $134m, or 18.4%, on the previous year.
Individually, Audi had the largest level of profits at $352.2m, up 21.9%, followed by Blom with $330.7m, up 12.9%, and Byblos with $178.4m, up by a significant 22.6%. In terms of profitability ratios, all three banks performed well by international standards, with Blom leading the way in return on average equity with a highly credible return of 21.06% followed by Byblos on 16.55% and Audi on 16%.
It is important to note that these three banks have contributed significantly to the dramatic expansion of lending to Lebanon's private sector in 2010, extending $17.5bn in loans, or 25% more than in 2009. It should also be noted that these banks, reflecting growing expansion abroad, obtain more than 25% of their profits from operations outside Lebanon. Audi’s general manager, Samir Hanna, expects this external figure at Audi to grow to 40% in the next two to three years.
But while the major banks have performed well in difficult circumstances it is also clear in talking to individual institutions that they are each adopting different strategies both at home and abroad. With the Banque du Liban governor against any mergers among the leading alpha banks, the major banks are targeting different markets. While the smaller banks may be looking at consolidation, this is not the case with the top institutions.
Audi's pillars of growth
Bank Audi, the largest bank in Lebanon, with total assets at the end of 2010 of $28.7bn, customer deposits of $24.8bn and shareholders’ equity of $2.4bn, has been going through an expansion phase in recent years, both organically and through acquisitions. According to the latest report from rating agency Moody’s, the group’s market share is close to 22% of deposits and 25% of loans.
Despite the recent regional upheavals, Audi’s Mr Hanna explains that payments in Egypt, Syria and Jordan continue as normal and, while provisioning will increase, he still forecasts an increase in the bank's bottom line this year. Discussing the bank’s strategy, Mr Hanna considers Turkey (where Audi has recently made an application for a banking licence), Iraq, Jordan and Syria as domestic economies that will provide a core pillar of the bank's future business. He sees Lebanon, with its 80 branches, as another pillar, with Egypt and Sudan together providing a third important pillar. He also views Algeria and Tunisia (where Audi is planning to buy a small bank) as the fourth pillar, with another possible pillar coming from the Gulf Co-operation Council states through the profitable niche businesses that can be offered to expatriates there.
Blom's organic expansion
Blom Bank, the second largest and highest rated bank in Lebanon, has an asset base of $22.3bn and a deposit market share of about 19%, which has been achieved through the organic growth of its relatively modest domestic network of 70 branches. While it bought a bank in Egypt in 2005, Blom chairman and general manager Saad Azhari prefers to grow organically and build market share gradually. The bank’s high loan criteria, conservatism and lower overheads have helped to bolster its efficiency and produce a low cost-to-income ratio of 35.62% in 2010. And Blom has successfully delivered consistent annual net income growth, with an average growth of 18.8% between 2002 and 2010.
Blom has established a wide regional and international network, with a total of 165 branches, including domestic branches. The bank has branches in Jordan, Cyprus and Syria, while its 100%-owned subsidiary in France heads the group’s operations in Romania, the UK, the United Arab Emirates and Switzerland. In 2009, Blom established an investment bank in Saudi Arabia and a private bank in Qatar, and it sees itself as a leading MENA region player, providing full banking services in the four key markets of Lebanon, Egypt, Syria and Jordan.
In looking at the recent regional political turmoil and the prospects for 2011, Mr Azhari is surprisingly bullish. “Profits will be better this year than in 2010. While there will be a slight slowdown in Egypt, the group as a whole will be up, working as usual.” While he notes that extra provisions have been taken in Egypt and a strong brake has been applied there, he believes Jordan is still fine and Syria is not showing any major problems. Blom is expanding in both Syria and Jordan and it expects to have 10 branches in Jordan by the end of 2011.
While Mr Azhari believes that Lebanon's economy is unlikely to perform as well as it did in 2010, when 8% growth was achieved, he thinks growth of 5% to 6% is possible if a broad-based new government can be formed. With compound annual growth of 15.4% in deposit gathering between 2002 and 2010, and annual growth in total net lending of 22.9% over the same period, Blom remains in expansion mode in most places and is launching an equity fund in Saudi Arabia for foreign investors in the summer.
Byblos's frontier markets
Byblos Bank, Lebanon’s third largest bank with assets up 12.6% in 2010 to $15.3bn, also has a broad strategy with almost 80 branches in Lebanon and a unique international network. Besides a presence in London, Paris and Cyprus, the bank operates in Syria (nine branches), Armenia (three branches), Sudan (two branches), as well as in Iraq and the Democratic Republic of Congo (DRC).
Sami Haddad, chairman and general manager of subsidiary Byblos Invest Bank, believes it is difficult to achieve above-average profitability in the highly competitive Lebanese market and says the frontier markets such as Sudan, Armenia, Iraq and DRC are grossly underbanked, and that this is where the growth potential is high and the competition weak.
He says Iraq has huge potential, as it holds huge quantities of oil and water, and Byblos has branches in Erbil and Baghdad, with a new branch in Basra to open imminently. Also, markets such as DRC, with a population of 70 million, huge resources and a significant Lebanese expatriate community, offer strong opportunities. “We will not go to Saudi Arabia or the US because we will not be competitive there,” adds Mr Haddad.
Byblos’ approach is to diversify abroad, but it remains very conservative and highly liquid. The bank’s capital adequacy is at 17%, with NPLs low at 2.3% and with 150% coverage. On the economic front, Mr Haddad believes 2011 will not prove as good as 2009 and 2010 for a number of reasons; uncertain domestic politics, rising government deficit, uncertain regulation, rising interest rates and the LCB situation, which will lead to a slower growth rate. On the deficit, however, he believes it is manageable but could be helped if the new government looked more closely at increasing negligible taxation rates, raising electricity tariffs and privatising the telecoms companies. “Privatisation could raise $7bn, a third of the deficit, boost the stock market and create jobs,” he adds.
Fransabank's added value
Fransabank, Lebanon’s oldest bank, established in 1921, has the largest local network with 107 branches and like others did well in 2010, with net profits up significantly by 40.25% to $146m, assets up 13.3% to $12.3bn, loans up by 36% to reach $3.1bn and a return on average equity of 13.3%. General manager Nadim Kassar believes Lebanese banks have fared well of late because the owners are not chasing exceptional profits but are keen to maintain constant steady growth and have willingly maintained high liquidity levels. “Liquidity is an advantage and in the longer term, liquidity brings more liquidity,” he says.
Also, because of the family ownership structures of the banks, institutions are conservative with regard to distributing profits. Normal distribution levels are between 30% and 40% (Fransabank’s is 25%), thereby allowing more for recapitalisation.
Like others, Fransabank’s external strategy is built around adding value. “It is pointless to go to New York so we go to places where we can gain added value and have a role; being in the Gulf is not on our agenda but we are looking to Syria and Algeria,” he says. Fransabank is the only Lebanese bank in Algeria and Mr Kassar believes the country has a lot of potential, as does Syria.
Besides looking to establish in Iraq, Fransabank has just bought an 18-branch bank in Cyprus called USB Bank. It was bought by Fransabank’s 80%-owned Lebanese subsidiary, BLC Bank. “We can improve on USB’s performance; we go to places which we know and have a strong Lebanese community,” he says. Fransabank has merged seven banks into its group in the past 10 years (BLC was acquired in 2007), and sees its different brands as part of its core strength.
BankMed's family strengths
BankMed, Lebanon’s fifth largest bank with 83 branches and assets totalling $11bn at the end of June 2010, is owned by the well-known Hariri family. Rafic Hariri was assassinated in 2005 when he was Lebanon's prime minister, and his son Saad Hariri served as prime minister from November 2009 until the collapse of his government in January this year. The Hariri group also has a large shareholding in Amman-based Arab Bank, one of the largest banks in the Arab world with operations across more than 30 countries and close connections to BankMed.
In recent years BankMed has expanded but remains focused on key business lines such as wealth management, retail and capital markets. In 2007, the bank bought a 27-branch bank in Turkey, called Land Bank Turkey; in 2008 it established an investment company in Saudi Arabia. It also has a private banking subsidiary in Geneva. In looking at other areas in the region for expansion, executive general manager Mohamed Ali Beyhum says: “The Egyptian banking system is becoming saturated. Countries in north Africa such as Algeria and others are not yet saturated and still present attractive opportunities. Today banking is about flexibility, not only about strength. Investment strategies need to be flexible to cope with the changes in the current regional environment.”
Bank of Beirut targets ex-pats
Bank of Beirut is the seventh largest bank in Lebanon and has recently completed the largest banking investment outside Lebanon, with the $420m acquisition from Cyprus-based Marfin Popular Bank of 85% of the shares of Laiki Bank (Australia). This cross-border transaction in Australia reflects the deliberate strategy of Bank of Beirut to expand in selected markets with strong Lebanese diaspora, estimated in Australia to be 500,000.
As a result the bank will have a total network of 65 branches, of which 50 are in Lebanon, 10 are in Australia through Australian-regulated subsidiary Laiki Bank (Australia), two in the UK and Germany through Bank of Beirut (UK), one in Cyprus and two in Oman. The consolidated balance sheet will be about $9bn, with $6.9bn in deposits.
Bank of Beirut chairman and general manager Salim Sfeir says: “Entering the Australian banking sector is a direct materialisation of our strategy to expand outside Lebanon and serve our customers wherever they are. The new bank, renamed Beirut Hellenic Bank, has catered extremely well to the Greek and Cypriot communities in Australia for many years. We plan to build on these foundations in the years ahead and to reinforce the already indelible links between us.”
Islamic banking set to grow?
Arab Finance House (AFH) is the largest of the relatively small Islamic banking contingent in Lebanon of five banks. Islamic banking accounts for less than 1% of Lebanese banking assets and 17 branches out of a branch total of more than 900. But while Islamic finance has grown significantly in recent years from virtually nothing, AFH executives are worried by the lack of awareness of Islamic banking among the Muslim population. Only 35% of Muslims are estimated to be aware of Islamic finance in Lebanon and traditional banking still holds sway.
Nevertheless, AFH, which accounts for 60% of all Islamic business in the country, is not deterred. AFH assistant general manager Nabil Ezzat Osman is bullish about the potential, especially the financing of small and medium-sized enterprises. Also, AFH has strong shareholders. It is 60% owned by Qatar Islamic Bank (QIB), and with plans afoot to restructure QIB it is possible that the Qataris may invest further in Lebanon in the months ahead and AFH may see some significant changes too.
| Is the Lebanese-Canadian issue over? Has the hastily agreed merger of Lebanese Canadian Bank (LCB) with Société Générale de Banque au Liban (SGBL), following accusations in February of money laundering by the US Treasury, silenced the rumours and concerns of the global banking community? In a sector where family shareholdings are key drivers, Lebanon's banks can ill afford reputational issues. Integrity is critical. As such, quick and drastic action by the governor of the Banque du Liban, Riad Salameh, in visiting the US and arranging the merger, appears to have lanced the boil and the governor is convinced there is no threat to the country's banking sector (see interview). And the flow of deposits into Lebanon increased in February after a slight drop in January, reflecting that confidence in the country's banking sector remains unaffected. But are bankers so sure? They seem assured by US officials that the incident related solely to west Africa dealings and that the US was not targeting Lebanese banks overall and there was no target list of banks. The rumours of US targeting for domestic political purposes have been quashed. So LCB, Lebanon’s ninth largest bank, has quickly disappeared from the scene. Officials at neither LCB nor SGBL were willing to comment on the matter or suggest when the merger would be finalised, but bankers broadly agree that while the incident was not helpful there have been no adverse repercussions on banking in Lebanon. |
