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Middle EastSeptember 3 2012

Cause for optimism in Lebanon's banking sector

After performing admirably in the aftermath of the global financial crisis, the growth of Lebanon's banks dramatically slowed. The Arab Spring uprisings in the Middle East and north Africa last year further unsettled the country's financial sector, but, as leading figures from its banks explain, there is still a great deal of room for optimism.
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Participants:

  • Saad Azhari, chairman and general manager, Blom Bank
  • Freddie Baz, group chief financial officer and strategy director, Bank Audi
  • Sami Haddad, general manager, international banking and investment, Byblos Bank
  • Nadim Kassar, general manager, Fransabank 
  • Makram Sader, secretary-general, Association of Banks in Lebanon
   

Q. Last year was an eventful year for Lebanon; you were without a government for the first six months of the year and also faced the challenges that were presented by the Arab Spring uprisings and the eurozone debt crisis. In simultaneously facing these domestic, regional and global challenges, Lebanon’s economic growth fell from 7.5% in 2010 to just 2% in 2011. Have you seen an uptick in growth so far in 2012, and how do you feel the country's economy is performing today in general? 

Nadim Kassar: We have witnessed in the first three months [of 2012] an improvement in the main key indicators of the Lebanese economy. However, as of April, the political situation and the events we are witnessing in the Arab World in general and in the neighbouring countries in particular, are weighing heavily on the overall economic activity in Lebanon as evidenced in the drop in these economic indicators. Nevertheless, I believe if we can restore some stability to the internal political situation, we will still be able to achieve acceptable economic growth, especially given that the banking sector is still witnessing growth in its deposits and investments.

Saad Azhari: The forecast of the World Bank for 2012 is 3.6% growth [for Lebanon] and I think the International Monetary Fund's was about 3.6%, so these are improvements on their forecasts for 2011. To date, we have witnessed a domestic annual growth in deposits of about 8% and a 13% growth in lending so the activity is relatively acceptable and good. It’s not as high as it was a few years ago, but still, it is a healthy activity.

Freddie Baz: What has been achieved between 2008 and 2010, which were exceptional years for Lebanon, could not be considered as benchmarks. We have to be very careful about this. We have had historically high growth rates, with gross domestic product [GDP] averaging 8.5% a year, because Lebanon benefited throughout the global turmoil by attracting significant inflows which have translated into important waves of new loans to the domestic private sector, which [was responsible for] 70% of the GDP growth in Lebanon, spurring those high GDP growth rates. So when talking about decreasing growth rates in GDP, the deficit in growth should be assessed with what is required to ensure a soft lending scenario for the persisting fiscal imbalances in Lebanon, and not with respect to those 8% and 9% figures achieved between 2008 to 2010.  

We have had historically high growth rates, with gross domestic product [GDP] averaging 8.5% a year, because Lebanon benefited throughout the global turmoil by attracting significant inflows

Freddie Baz

Sami Haddad: The outlook for the remainder of the year is not very rosy. First of all, June has not been good, either on the political front, or on the security front. The summer season always weighs heavily on our GDP and the outlook for this period is not good for all sorts of reasons. Plus, we are seeing a slowdown in the demand for credit – it’s still expanding, but at a slower pace.  

Mr Azhari: Rather than having, for example, credit growth of 23% in 2010, we witnessed this year and last year a growth of about 13% in the banking sector. Still healthy, but lower than it has been in previous years.

Makram Sader: To make some consensus, we are all aware of the risk of our operating environment and we are taking it very seriously. And this environment is beginning to impact us rather more negatively than positively. But as Mr Baz said, the situation in terms of growth in our deposit base and economic growth is still positive for us and acceptable.   

Q. Where do you see the key opportunities in Lebanon lying, and what are the key areas that are driving domestic growth today?

Mr Azhari: Definitely not the real estate sector because we already have a lot of availability in the market. We have seen a reduction in construction permits by about 10% in the first five months of this year. But if the political and security situation improves, tourism and services will be the first sectors to benefit. 

Mr Sader: I think to recover a growth rate of more than 5%, we need the retail business and the wholesale trade to recover. 

Mr Kassar: Fransabank has a lot of demand from small and medium-sized enterprises [SMEs] and the retail sector. Corporates are shying away from investment today. As for real estate, we’ve seen a shift in the way people think. A few years ago there was high demand for luxury apartments, but now we are seeing a demand for smaller apartments that usually need housing loans, so we can target this area too.

Mr Baz: We have to distinguish between defensive businesses and vulnerable businesses. Defensive businesses – both last year and this year – are still doing well and represent all kinds of food and beverage activities, pharmaceuticals, etc, while vulnerable activities are obviously tourism-related businesses and real estate. But in my opinion, it is about the overall sentiment improving, triggering services industries which represent 70% of Lebanon's GDP into bigger volumes.

Q. What about Lebanon's balance of payments, which at roughly $2bn recorded its first deficit in 10 years in 2011.

Mr Azhari: It is effectively a result of a 25% reduction in current and capital flows, mostly foreign direct investment and maybe tourist receipts. It was not in any way related to the deficit of the government. In fact, in the past four or five years, the level of bank financing of the government debt went down from 26% to about 20% of the balance sheet of the banks. So there is no real increase in the sovereign risk, it’s the opposite, and we have plenty of liquidity, so there is no relation with that. It is not alarming but it is a problem that has to be tackled. 

Mr Haddad: No, it is very alarming. A deficit of balance of payments of $2bn for the first time in 10 years is terrible. We can paint it whichever way – abstract or whatever. But in the first four or five months of this year, we’ve seen another deficit pointing to another $2bn, probably more this year. Bad? Obviously very bad. Let’s not kid ourselves.

Mr Baz: We must put things into perspective. Sometimes a combination of two positive trends can translate, accounting wise, into a negative result. What is the balance of payments? This is a change in net foreign assets, so these are the foreign assets of the country minus the foreign liabilities of the country and the change in those net foreign assets translates into the balance of payments.

Retail today represents more than 25%. A few years ago it was about 18% to 19% so we have [achieved] good diversification in the area of lending

Makram Sader

We have witnessed an increase in non-resident deposits by $400m in the first four months [of 2012]. This is a foreign liability for Lebanon, but this is a positive development because it has boosted liquidity in the system. At the same time, leading banks withdrew $600m from their liquidity abroad which has shifted into domestic lending in foreign currencies, translating into a decrease in the country’s foreign assets.

But this is a positive development too, because instead of putting our money around our correspondent banks, we are withdrawing it and we are lending it to the domestic private sector. So increasing the growth of the non-resident deposits by $400m within the context of withdrawing $600m of foreign assets and translating them into domestic lending has translated into this deficit of balance of payments by $1bn. But this is a positive development too because instead of putting our money abroad with our correspondent banks, we are withdrawing it and we are lending it to the domestic private sector.   

Mr Sader:

It would be terrible if you could not finance your current account deficit. But as far as even this year is concerned – a 14% deficit in our current account for 2011, which is a very high percentage – we are still able to finance it because, as Mr Baz says, we accumulated a lot of foreign currency surplus over the past 10 years. This current account deficit isn’t a problem. We are able to finance it. 

Mr Kassar: The main issue is that the government keeps spending as if nothing is really happening and there are no solutions. It is spending in places where the private sector can and should be. When the government starts privatising, the banking sector can finance the private sector instead of financing the government, and we will see an improvement in these figures.

Q. What are the authorities doing to help encourage diversification of banks’ lending policies? Is enough being done?

Mr Azhari: The government did a great thing in the housing laws two years ago when it allowed banks to use their reserve requirement to finance housing projects. We have seen housing loans go up to about $5.6bn.

Mr Sader: Retail today represents more than 25%. A few years ago it was about 18% to 19% so we have [achieved] good diversification in the area of lending.

Mr Baz: Our consolidated loan portfolio is very well diversified by economic sectors. What is needed much more than this diversification by economic activity is a better diversification or a better balanced breakdown of total loans between corporate, commercial and SMEs and retail.

There are a lot of big companies that have very little equity and depend too much on lending from banks

Saad Azhari

When you look at the consolidated exposure of Lebanese banks with respect to GDP, we are talking about close to 80%, but this is mainly comprised from big corporates and commercial. Household indebtedness in Lebanon as a percentage of GDP is still very, very limited with respect to the real per capita income of the country.

By comparison, we have [an average] $11,000 per capita income, which is level with Turkey. In Turkey, loans to SMEs and retail loans represent 55% of total loans. This is a good benchmark. So what is needed [is to increase lending to SMEs], and to further [move] to the consumer segment. Mortgages have been growing steadily, but there is still a lot of potential and this has nothing to do with the government or with any kind of reforms.

Mr Azhari: The government could introduce a new companies law that would force companies to have a certain level of equity. Because unfortunately there are a lot of big companies that have very little equity and depend too much on lending from banks. If there is a new company law which forces companies to have a minimum level of equity, this will make the situation healthier. Also, it improves the capital markets and helps SMEs compete better in terms of getting loans. The private-public partnership law would also improve the capital markets and infrastructure development.   

Mr Kassar: I think the question should be divided. In terms of what the central bank has been doing… it has given us some incentives in certain areas to promote and lend more to certain sectors. Now, in terms of what the government has been doing, I think [that is] close to nothing. It has not done anything with privatisation and as for taxation, it is trying to mess things up even more than it was already. We have a series of new draft taxation laws that are total nonsense.

Mr Haddad: The real estate sector has been a main driver of economic growth. But there is also a significant amount of funding that goes to middle- and low-income people and there is a unique, extremely successful experiment which we don’t talk enough about, which is the housing bank. The housing bank is a bank owned by the banks and by the government and this bank basically makes loans to the lower and middle classes. The maximum loan is $300,000. It’s a remarkable success story in Lebanon because the perception is that the public sector is corrupt, riddled with political influence. You look at this bank – it’s amazing. Correctly funded, profitable and, most importantly, it lends to the right people that [the markets usually do not reach].

Most importantly, and for me this is unbelievable, the non-performing loans of the housing bank are less than 1%. I have seen many housing banks around the world that are unmitigated disasters, and [Lebanon's housing bank] really is something that we have all built together, and we can export this expertise to other countries.

Q. How has the Arab Spring altered your international expansion strategy? Have you had to reduce your activities in Syria, and therefore look to other markets? Bank Audi has recently been granted a commercial banking licence in Turkey – the first to be granted in 10 years.

Mr Baz: Bank Audi was interested in the Turkish market long before the Arab Spring, so it’s not related. It’s not that we are compensating, but it happened that we were granted the licence at a time when we were witnessing some difficulties in [other countries]. The rationale of our presence in Turkey is to support our original expansion strategy, so nothing has changed at the level of our regional expansion strategy.

[The rationale behind our activity in] Turkey is to support this regional expansion with respect to the exponentially growing trade flows between Turkey and the Arab world, coming from a mere $4bn a few years ago to $42bn last year. It is a huge opportunity because it corresponds approximately to a yearly letters of credit commission pot of $400 million.

Being present in six countries already in the Middle East, this provides us with a competitive advantage to build a captive market share in this business. If we can get 5%, 10% or 15% it’s already $40m to $50m of recurrent commissions on a yearly basis. It is by itself a good justification for an investment, but we believe that with our know-how, being Lebanese, being good bankers, there is a lot of expertise to export to Turkey and to build a captive market share, not in the mass retail segment, but more in the individual banking segment and in the middle SME segment, which corresponds in terms of yearly turnovers to our big corporates in Lebanon.

Mr Azhari: At Blom Bank we are expanding both our presence in the countries that we are present in and also our product offering. Just last week, for example, I opened our first branch in Aqaba in Jordan. We now have 11 branches in Jordan, and over the past year and a half, since the Arab Spring, we have opened four branches in the country. We are continuing our plan to expand, and our deposits are increasing, lending is increasing and our profits are increasing.

We are also expanding our presence and our portfolio in Qatar and our investment banking in Saudi Arabia. We recently launched a very important fund on Saudi shares and it is the second best performing fund in the country.

In asset management we have done very well in terms of funds managed for the Lebanese market, the Egyptian market, the Jordanian market and the Saudi market... not only on equity but also on bonds. And now we are also launching a Middle East and north Africa fund, so it’s improving a lot. Also, we have created a real estate fund in Saudi Arabia, we provided the equity for an important real estate development in Riyadh, and we arranged the funding from banks to that fund. So our investment banking activity is improving, especially in the Gulf, but also in other places that we are present in. We want to strengthen our commission income, to continue to strengthen our lending, and also maybe to expand in the [Middle East], perhaps a little more carefully. Not as fast as we had hoped for, but we will continue with our expansion and strategy.

Mr Sader: Today, the Association of Banks in Lebanon is present in 33 countries, in 95 cities, and we have 222 branches outside Lebanon, so we have a really good banking network abroad.

Mr Haddad: Bank Byblos tries to go to underbanked markets. One obvious largely underbanked market is Iraq. We already have three branches there. We were among the first to set up a branch in Irbil. We did the same thing in Baghdad, and three months ago we opened a branch in Basra. We expect to [open] at least two more branches in the next two years in Iraq. The other possible area of expansion is west Africa, sub-Saharan Africa, and we are looking at a number of countries there. We have a presence in the Democratic Republic of Congo.

Mr Kassar: [For Fransabank, it is a good time] to consolidate what we have. The timing is right to rethink our whole strategy. We are looking for opportunities in Iraq, and we are doing very well in Algeria, which is a very promising market. But over the next few years, with all the turmoil happening around us, we should focus on consolidating what we have to ensure that we have a head start when things eventually settle.

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