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Middle EastMay 1 2006

Shopping abroad for Arab liquidity

More confident Lebanese banks have been moving into regional markets, helping to win another ratings upgrade, write Jon Marks and Eleanor Gillespie.
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The Middle East remains a bundle of contradictions, with crises in Iran, Iraq and Syria, not to mention Israeli-Palestinian relations, juxtaposed with booming regional markets that are benefiting from the global oil price hike and a recognition that, finally, Arab markets must accelerate reform and modernisation. Few places are as buffeted by the political winds as Lebanon, nor do they benefit as much from Middle East and north Africa (MENA) region economic booms as Beirut’s canny banking community.

With the region awash with liquidity, some of it flowing into their vaults, the main Lebanese banks are diversifying as quickly as possible into other markets. Blom Bank has bought Egypt’s Misr Romanian Bank and its big rival Bank Audi has also purchased a small Egyptian institution (see The Banker, March 2006, page 76).

Wealth glut

The Gulf’s huge wealth is likely to provide a focus for much upcoming activity, and banks are also encouraged by an upturn at home after the political crises of the past year. Bank Audi, for example, announced net profits for 2005 of $106.4m, an increase of 48.8% from $71.3m in 2004. The bank saw a 9.6% growth in its assets, from $10.5bn in 2004 to $11.5bn last year.

Such results are extremely important for the Lebanese economy – 70% of whose debt is held by Beirut banks (and most of the rest by the Lebanese diaspora and ‘sit and hold’ Gulf investors). As one financier puts it: “Achieving healthy results is critical in a country where the banking system remains significantly larger than the wider economy.”

“Boom” is thus a word much on Beirut bankers’ lips in a business environment that is, arguably, working in Lebanese banks’ favour as never before.

“The boom is intimately linked to the Gulf, and is due to a combination of elements,” says Florence Eid, JPMorgan vice-president for MENA region strategy and economics. “Retail deposits have grown, so have incoming equity stakes – through privatisations and other stock sales – and private equity investments. And all that is propelling Lebanese banks to go regional as quickly as possible.”

They have started in Syria – a state-dominated economy whose surprisingly resilient private sector has long depended on Lebanese banks to function – and have established operations in such “difficult” markets as Sudan and Iraq. With substantial recent activity in Egypt, this internationalisation is reaching another stage.

Major Lebanese banks are exploiting a situation “like never before”, says Ms Eid, a former professor of finance at the American University of Beirut. Emerging from the country’s protracted civil war, Lebanese banks had considerable know-how, which they developed to become unparalleled players in regional markets.

“But while they had the know-how and the contacts they never had the money before.” The boom in Arab liquidity is providing this, and helping to ensure the bigger players’ future beyond the confines of the small domestic market.

Worth the upgrade

In March, Moody’s Investors Service upgraded its financial strength ratings (FSR) for three major Lebanese institutions – Blom, Audi and Byblos Bank – “taking comfort from their increasing efforts to diversify their revenue base outside of Lebanon”. Moody’s observed: “All three rated banks appear to have strategies in place to expand their banking operations, mainly in the MENA region, which is expected to gradually loosen their interdependent relationship with the Lebanese government.”

This “will provide the banks with more investment opportunities, while at the same time diversifying their income streams away from the risky class of Lebanon-related debt”.

This reflected a wider macro upturn. Moody’s changed the banks’ FSR ratings outlook to “stable” from “negative” – their category since March 2005, when a sovereign downgrade (to B3 from B2) was triggered by the political turmoil that followed ex-premier Rafiq Hariri’s assassination and what Moody’s called “the negative impact that this had on both the macro-economic environment and the country’s financial system”.

Several major Beirut banks have, in recent months, sought capital increases to finance regional expansion. Blom held a successful global depository receipts issue earlier this year, which raised its capital by $276m, with interest coming mostly from the Gulf and international emerging markets funds.

Byblos raised its capital to $700m in December and plans another increase, of up to $400m, this year.

In January, Bank Audi announced its planned $600m capital increase, to $1.5bn, with a $450m contribution from Cairo-based EFG-Hermes, in return for a 20% stake.

Gulf interest

Outside interest in Lebanon’s banking sector is not a one-off. Qatar’s Supreme Council for Economic Affairs and Investment has bought 96.22% of BLC Bank in a $236m deal after outbidding no less than 21 other banks.

Since July 2002, BLC Bank had been under the control of Banque du Liban, with the central bank having to pump in $150m following problems with the previous management that included mismanagement of funds.

But Gulf investors are also competitors as well as partners. Bank Audi’s $94.4m acquisition of Cairo Far East Bank (CFEB) came in the face of stiff competition from the UAE’s Union National Bank and Qatar’s International Islamic Bank; other banks had also expressed interest, including Dubai-based Mashreqbank, and Egypt’s Société Arabe Internationale de Banque and Banque du Caire (which already had a stake in CFEB).

The sale is in line with the Egyptian government’s plan to privatise state-owned banks and consolidate the number of banks to 30 over the next five years. The recent uptake from cash-rich Lebanese and Gulf banks is well in excess of what might have been expected not long ago.

The CFEB purchase followed expressions of interest in United Bank of Egypt (UBE). “The Egyptian market is very enticing, especially after the government adopted new economic reforms... even more so if you consider that the country has a population of more than 70 million and a gross domestic product of over $100bn,” says Bank Audi’s chairman Freddie Baz. He says Bank Audi was given permission by the Central Bank of Egypt to carry out due diligence on UBE.

Bank Audi is also closely watching Iraq, which Mr Baz says “has great potential because this market is similar to the Saudi market in the early 1970s, but we must wait until the security condition improves”.

Bank Audi has received approval from Iraq to open a subsidiary and there have been reports it is in talks with Saudi investors to form an entity called Al Mashreq Bank. The bank has said it intends to open a branch in northern Iraq this year – a far safer choice for now than in Baghdad.

Blom Bank has also indicated that Iraq is of interest, although bank officials have cautioned that they will be more interested when things stabilise.

Sources say Byblos – which recorded a net profit of $69m in 2005, 28% up on 2004 – is also considering an Iraqi operation. Byblos attributes its recent growth to non-traditional lending activities, which increased by 47.8% over 2004. International activities, from branches in Belgium, France, the UK, Cyprus and Sudan, increased from 3% in 2004 to 13% of group profits last year.

Byblos has also expanded its presence in Africa – it entered the Sudanese market in 2004 – and last year acquired an Algerian bank, Al Rayanne, which included eight local offices.

Banks also have a wider role in developing the Lebanese economy. This spring, Byblos received a $60m, 10-year loan from the European Investment Bank– the first bank in the Middle East to receive an EIB loan without a state guarantee – to support eligible projects in financial sectors including industry, tourism, health, higher education, information technology, energy and telecommunications.

Fund managers are encouraging small and medium-sized enterprises with no more than 500 employees and assets of less than €25m to apply for allocations for expansion, rehabilitation and modernisation projects.

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