A country that lies on a geopolitical faultline yet still fosters a strong banking industry, Lebanon's story is one that warrants special mention at a time of flux for financial services. High liquidity, well-capitalised institutions and good return and risk measures are just some of the qualities, albeit the most crucial ones, that characterise the country's banking sector.
Those characteristics remain in spite of the damage inflicted on the financial services sector worldwide. While a number of major Western financial institutions succumbed to the global malaise triggered by toxic assets based on the US subprime mortgage market, Lebanon's banks were largely immune and even profited from the situation. Over the course of 2008, the value of deposits placed with Lebanese banks averaged $970m per month, and while there was a dip following the collapse of Lehman Brothers, the flow of funds picked up considerably from January 2009 with an average monthly figure of $1.5bn recorded throughout last year.
A watchful eye
The Central Bank of Lebanon (BDL) has played a considerable role in ensuring Lebanon's banking sector was well placed to avoid external shocks. The BDL's regulatory policy can be labelled as conservative but has been invaluable in keeping the country's banks safe. The most significant measures include banks not being allowed to take on too much debt, having to have at least 30% of their assets in cash and being forbidden from speculating in risky packages of bundled-up debts - precisely the root cause of the financial crisis.
"It is a mark of the banking system's success that other countries are looking at the BDL's prudent regulatory and precautionary directives to strengthen the stability of their banking systems," says Saad Azhari, chairman and general manager of Blom Bank, Lebanon's second biggest bank. "Due thanks should be given in this regard to the BDL's governor and its Banking Control Commission."
Speaking to The Banker late last year, the BDL's governor, Riad Salameh, explained his philosophy on regulation: "Our vision is that banks should preserve the deposits. We have stressed the solvency issue, but also the liquidity issue so that banks do not have to rely only on the interbank market." The result has been a highly liquid banking system, with deposits accounting for 80% of Lebanese banks' capital bases.
However, senior banking figures have been quick to establish that local institutions also played an important part in keeping the sector on a strong footing. "While our central bank should rightfully be commended for its role in preventing the global financial crisis from adversely affecting our banking sector, the role played by our bankers should also be highlighted," says Samir Hanna, general manager at Bank Audi, Lebanon's biggest bank.
"Our bankers realise their responsibilities to their depositors - going beyond their means by investing in risky securities in order to make more money is not a Lebanese approach. Clients do not place deposits with local banks just because we are well regulated," he adds.
Whether or not the banking sector's continued prosperity is mainly due to the regulator, the upshot of it all is that Lebanon's banks have clearly performed well at a difficult time.
Last year was another 12 months' progress for Lebanese banking institutions, which posted growth on the key fronts of assets, private sector deposits and capitalisation. Total assets for the sector reached $115.25bn, up 22.3% from the December 2008 figure of $94.25bn. Total private sector deposits grew year on year to reach $95.8bn at the end of December 2009.
The total equity capital of commercial banks amounted to $7.94bn at the end of 2009, up from $7.1bn a year earlier. Moreover, the consolidated balance sheet of commercial banks revealed credit to the private sector increased by 15.18% year on year through December 2009.
Positive signs
Although it is still relatively early to draw conclusions about market performance in 2010, initial indications are positive. The Association of Banks in Lebanon says the consolidated balance sheet of the country's commercial banks shows that total assets reached $118.3bn at the end of February of this year, up 2.6% from the end of 2009 and up 24.4% from the end of February 2009. Furthermore, private sector deposits totalled $97bn, up 1.4% from the end of 2009 and up 23% from the end of February 2009.
In light of such numbers, local industry figures are understandably buoyant. Nassib Ghobril, head of economic research and analysis at Byblos Bank, one of Lebanon's most prominent banking institutions, says: "The global financial crisis has paradoxically benefited our country's banks. We have witnessed an unprecedented influx of funds into our banking system, particularly as our banks were shielded from the worst effects of the crisis and have strengthened their reputations as a result.
"Moreover, there has been increased confidence in the Lebanese pound, with more deposits being placed in the local currency."
This increased popularity of Lebanese pound has been a notable feature of the banking sector's recent growth. While the economy remains mainly dollarised - approximately two-thirds of deposits are placed in dollars - the rate of dollarisation has declined markedly compared with the recent past. An indisputable factor behind this development has been the higher rates of interest offered on deposits in the local currency, which is approximately 4% higher than that offered on dollar deposits.
However, does further dedollarisation bode well for the country in the long term? In the eyes of a number of senior banking figures, the answer is a resounding yes. The view is that there is greater confidence in the Lebanese pound as a result of the positive conditions across the region, namely the banking sector's good health and the prevailing calm on the domestic political scene. Moreover, other factors are aiding the Lebanese pound's cause - a higher percentage of the government's debt is denominated in the local currency and the dollar has suffered during the crisis while the Lebanese pound remained stable.
Riad Salameh, BDL's governor
Growing at Home
Far from resting on their laurels, Lebanon's banks are still mindful of the areas in the domestic market that can be further developed. While many of the product and service offerings available in the West also exist in Lebanon, the range can be expanded. "I believe commercial banks should be in a position to offer more savings products, such as education and retirement plans. This particular area of the market represents a major opportunity for local banks. Wealth management can also be further developed. At present, portfolio management is not as developed as in other markets," says Mohamed Ali Beyhum, deputy executive-general of BankMed.
Online and electronic banking represents fertile ground for Lebanese banks, according to Freddie Baz, CFO and strategy director of Bank Audi. "At the level of services, commercial banks in Lebanon still have more room to manoeuvre. For example, electronic and online banking services are still quite limited here, while they are very developed in many other markets. Our banks should exploit the high IT penetration rate in Lebanon," he says.
Islamic finance, an industry that is particularly prominent in the Gulf region and parts of south-east Asia, also has great potential in Lebanon. The industry first emerged in the late 1970s, at a time when Lebanon was engaged in a civil war; this meant its introduction to the local market was somewhat delayed, arriving in the 1990s. "Given the fact that the industry took off at an earlier stage in other parts of the world, our market has done well to catch up. However, our task is not easy, particularly as a handful of conventional banks dominate the market for commercial products and services," says Fouad Matraji, general manager of Arab Finance House, Lebanon's most prominent Islamic bank.
"Moreover, the message that the industry is accessible to everyone - Muslims and non-Muslims alike - needs to be made clearer to the domestic market," he adds.
Consolidated Balance Sheet of Lebanon's Commercial Banks ($bn)
Looking Further Afield
Besides domestic aims, a number of Lebanon's banks are looking to other markets in pursuit of further growth. Byblos Bank is among the most expansive of Lebanon's banks, recently making an acquisition in the Democratic Republic of Congo that adds to its portfolio of operations in various parts of the Middle East, Africa and Europe.
Mr Ghobril says: "Byblos Bank's objective is to diversify its assets and sources of income by expanding in selective markets with strong economic growth and low levels of bank penetration. We aim to have 40% of our income and assets overseas so as to diversify our portfolio away from exposure to Lebanese sovereign debt and the local market in general. But Lebanon remains our priority market. Diversifying sources of revenue is a sensible strategy for any bank to pursue."
Blom Bank is also looking to increase its activities outside Lebanon. The bank is likely to expand its fund management operations in Jordan and Saudi Arabia while also strengthening its retail activities in Egypt and Syria. At present, approximately half of the bank's lending and a third of its assets are outside the country. Bank Audi and BankMed are among other prominent Lebanese banks with a significant overseas presence.
A number of risks threaten to deflate the bubble of optimism surrounding Lebanon's banking industry. One issue that is never too far from the thoughts of Lebanon's bankers is political stability - the lack of which has impeded the economic development of the country in the past.
The country experienced a prolonged civil war that lasted from 1975 to 1990. Although relative calm followed, tensions re-emerged after the assassination of prime minister Rafic Hariri in 2005. The 2006 war between Israel and the Lebanese political organisation Hizbollah devastated much of the country. A political stand-off ensued, following the end of president Emile Lahoud's term in office in October 2007 and was only resolved in May 2008 after Arab League-mediated talks in Qatar. The possibility of another war between Israel and Hizbollah arguably remains the most immediate security risk facing Lebanon.
On a more structural level in the financial sector, there is the feeling that the more than 50 commercial banks in Lebanon are too many in relation to the country's population of about 4 million, making consolidation a sensible option for the sector.
Bank Audi's Mr Hanna says: "Consolidation is approaching because the operating conditions are putting pressure on smaller banks as a result of greater competition and the decrease of spreads. The authorities, primarily the Central Bank of Lebanon, can step in and advise the banks in matters concerning consolidation. I still believe that the Lebanese market requires incentives for such developments to take place."
Perhaps of greater concern for the sector is the level of exposure to Lebanese sovereign debt, an ostensibly cumbersome relationship that has meant the ratings for Lebanon's banking system and sovereign position are closely tied. However, there are signs the situation is improving.
"The size of Lebanese banks is such that it has always allowed them to fund both the public and private sectors and simultaneously remain liquid. Especially in the past few years, banks have expanded credit to the private sector at double-digit growth levels, without leaving the government budget unfunded. Still, total credit to the public sector has declined as a share of assets," says BankMed's Mr Beyhum.
In spite of the risks that could derail progress, the market continues to inspire confidence. Moody's reported a stable outlook for the Lebanese banking system last month, a reflection of the sector's success in attracting deposits. Given that the economy is set to record a fourth consecutive year of growth, Lebanon's banks should have ample opportunity to expand their activities at home and record another successful year.
Lebanese commercial banks' assets, $bn
Lebanese commercial banks' capital, $bn
Total private sector deposits in Lebanon, $bn
