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WorldApril 30 2015

Lebanese banks go global

Operating in a relatively small domestic market often beset by social and political upheaval has led Lebanese banks to look overseas as a way of expanding, something from which they are now reaping the dividends.
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Lebanese banks go global

Lebanon’s banks were dealt another difficult hand in 2014. Despite being given cause for optimism earlier in the year, through the election of a new government and the enforcement of a new national security plan, conditions had quickly deteriorated by the summer months. While most of these problems stemmed from events in the wider Middle East region, including the rapid advance of the Islamic State to the country’s borders and the continued influx of Syrian refugees, they exacerbated long-standing domestic economic and political challenges.  

Nevertheless, when it comes to operating under testing circumstances, Lebanese banks are not short of experience. Data from the Alpha Report, covering the performance of the country’s top 14 lenders, shows that these banks performed more or less in line with previous years despite the challenges that 2014 presented. The total assets of these lenders grew by 10.4% in 2014, increasing from $176.3bn to $194.6bn. Meanwhile, net profits showed a year-on-year growth of 9.1%.

International expansion

Yet, it was the degree to which this positive performance was driven by the overseas activities of Lebanon’s banks that distinguished their growth in 2014. Though Lebanese banks have spent many years expanding their operations across the Middle East and beyond, recent results suggest this approach is now bearing fruit in a profound way. This partly reflects the maturation of some acquisitions, including Bank Audi’s move in to Turkey, but it also mirrors the changing political and economic landscape of the region.

While Syria and Iraq have both descended into chaos, thus affecting the Lebanese banks that developed an early footprint in these markets, Egypt has since stabilised and is on course to post steady growth in the coming years. Similarly, neighbouring Jordan has been a source of growth for some Lebanese lenders, while further afield banks from the country are expanding into the Gulf region, sub-Saharan Africa and even Latin America.

To put this into perspective, the domestic asset growth of the top 14 Lebanese banks hit 8.8% in 2014, while their foreign activities enjoyed asset increases of 16.9% over the same period. In fact, this theme dominated the results of the country’s largest banks, which saw their net profit from international activities in some cases carry the performance of the group as a whole.

“In terms of profit growth last year, most of our improvement came from our overseas markets and in particular Egypt. Our Egyptian unit registered a 50% improvement in net profits. It now represents close to 10% of the balance sheet and profits of the group,” says Saad Azhari, chairman and general manager of Blom Bank.

Blom's Egyptian boost 

Blom Bank, which operates a universal banking business in Egypt, has enjoyed strong growth across its various banking lines in the country. Loan growth surged in 2014, particularly on the retail side, with a total increase of 25%, while deposits grew by an impressive 25.5% year on year.

“Over the past 12 months there has been an important improvement in the Egyptian economy and business confidence is high," says Mr Azhari. "The most important thing for me is that the Egyptian people are optimistic; they want to take out loans and expand their businesses.” 

Other gains were seen in Jordan, where Blom Bank enjoyed 41% growth in net income in 2014, with the country now accounting for close to 5% of the lender’s total net income. Deposits grew by 11% through the bank’s network of 14 branches in the country.

Among the Gulf Co-operation Council countries, Blom Bank is enjoying considerable success through its investment banking subsidiary in Saudi Arabia. “In terms of our group business, our operations in the country provide us with the highest return on equity. We have found a niche in Saudi Arabia, catering to medium-sized, family-owned companies. The big investment banks look at deals that bring income of $10m or more and we’re going for deals that bring about $1m to $3m,” says Mr Azhari.

Turkey gamble pays off 

It was a similar story for Bank Audi, Lebanon’s largest lender, which is now beginning to reap the rewards of an ambitious push into Turkey. In late 2011, the lender was granted Turkey’s first new banking licence in 15 years, starting a new subsidiary, known as Odeabank, from scratch the following year. The costs associated with this expansion hit Bank Audi’s net profits in 2013, with a fall of about 16% recorded for the year. Despite the early concerns raised over this move, it now looks like a particularly shrewd decision in light of the positive numbers posted in 2014.

“For our Turkish subsidiary, we started the year with a budgeted negative bottom line, and we ended the year with $16m in profit after having accrued Tl20m [$7.45m] of more provisions than the initially budgeted figure for that year,” says Dr Freddie Baz, group chief financial officer of Bank Audi. “Now our Turkish operation is on track to start exponentially growing the bottom line. In 2015 it will start to normalise and reach an acceptable level for a Turkish bank. Its contribution to the consolidated earnings will grow accordingly and will represent, about two to three years down the road, one of the main contributions to the group's total.”

In little over two years of operations, Odeabank has gained more than 450,000 customers on the retail side, with a Tl12bn deposit volume. In the corporate banking space, the bank has reached Tl5.1bn of corporate deposits and Tl7.8bn of cash loans, while its commercial banking activity gained 9000 customers and increased its cash loan volume by 56% in 2014 alone.

The success of Bank Audi’s international expansion is starting to show on the bank’s overall performance. In 2010, 75% of the group’s earnings were sourced from the domestic market. By 2014, this figure had fallen to 58%, with 42% of all earnings stemming from Bank Audi’s foreign activities. Meanwhile, by the end of 2015 the breakdown of total assets is expected to reach 51% foreign and 49% domestic.

“Encouragingly, Bank Audi’s international expansion is self funded. It is funding these overseas operations domestically from each market,” says Alexis Philippides, an analyst with ratings agency Moody’s.

Bank Audi has also been benefiting from growth in sub-Saharan Africa and Latin America in the corporate and commercial banking space, through its relationship with the Lebanese diaspora. “We want to expand into sub-Saharan Africa over the medium term. We have no coverage there right now. We have sub-Saharan Africa desks in Beirut, Paris and Geneva and they have a yearly turnover of $1.9bn. Similarly, we have turnover of close to $2.1bn in Latin America through the same concept,” says Mr Baz.

Byblos's home comforts

Blom Bank and Bank Audi are by no means alone in this trend, with most Lebanese banks keeping an attentive eye on growth opportunities abroad. “Byblos Bank is currently present in 12 countries around the world and we keep looking for new expansion opportunities,” says Dr François Bassil, chairman and general manager of Byblos Bank, the country’s third largest lender by both assets and Tier 1 capital.

Yet, despite the growing importance of these international operations, most banks are still faring well at home.  “The [Lebanese] banking system is 3.7 times the size of the gross domestic product, so the fact that the [banking sector as a whole] is growing assets by 7% a year in the home market is still significant. The main driver of this has been deposits, which grew by $8.5bn,” says Mr Philippides.

Byblos Bank in particular enjoyed strong success in the domestic market. According to the bank’s 2014 annual report, its international activity accounted for 12.9% of total net income, which was a marginal decrease from the 13.2% recorded in 2013. Nevertheless, net profits for 2014 were up by 12.5%, reaching $175.7m, while total assets, of which 88.9% stem from the domestic market, grew 3% year on year.

“These and other aspects of the bank’s performance were achieved while maintaining strong financial cushions to mitigate unexpected risks and counter economic volatility. In addition, Byblos Bank reported a capital adequacy ratio of 16.5%, far surpassing regulatory minimums of 11.5% for 2014 and 12% for 2015,” says Mr Bassil. “Byblos Bank also continued to enjoy sound credit quality despite the economic slowdown in Lebanon, keeping net non-performing loans [NPLs] to net loans below 1% as of December 31, 2014, and achieving an NPL coverage ratio – including collective provisions – of 120% as of the same date.”

A new regulatory landscape

Looking ahead, a number of recent regulatory changes in Lebanon are expected to alter growth trends in the home market. The country’s central bank, the Banque du Liban, imposed new caps on the retail lending market covering consumer loans, revolving credits and housing loans in late 2014. This was, in part, to moderate the growth of the booming retail sector, which grew from 17% of total loans in 2004 to 28% of total loans by the middle of 2014, as well as to protect consumers.

“These measures, which are introduced along the limits that banks already had in place, ensure that lending is extended to qualified and solvent clients on the one hand, and aims to protect consumers on the other,” says Mr Bassil.

The new lending restrictions will require a 25% down payment on the purchase of new vehicles or homes. Moreover, caps have been introduced on the cumulative monthly payments associated with all retail loans. These repayments must not exceed 45% of each household’s monthly income, while for housing loans this figure sits at 35%.

Since 2013 much of Lebanon’s loan growth has been driven by the country’s mortgage market as a result of the central bank’s ongoing stimulus package. But because of these new regulations, most lenders are preparing for growth to come from other sectors in 2015. Particular attention is being paid to Lebanon’s mid-sized corporates and small and medium-sized enterprises (SMEs).

“The central bank’s new regulations covering retail loans are likely to impact growth in this sector. As such, we expect to see SME and corporate lending equal or outperform the retail space this year. SMEs, in particular, will be leading the way for Blom Bank in 2015,” says Mr Azhari.

In addition, the introduction of Intermediate Circular 383 in December 2014 mandates that Lebanese banks will be required to incrementally build collective provisions against their performing commercial loans portfolio. “Effectively, over the next three years banks will be required to build up general provisions equivalent to 1.5% of their total loan portfolios,” says Mr Philippides.

Strength test

These measures, in conjunction with Lebanese banks' drive towards Basel III implementation, will underscore the strength of the country’s banking sector. By the end of 2015, the country’s lenders will need a minimum of 8% common equity Tier 1 capital and 10% Tier 1 capital, which is a faster phasing than the Basel Committee on Banking Supervision’s recommendations.

While the challenges for Lebanon’s banks continue, their sophistication and resilience should ensure that 2015 is another successful year. Moreover, the importance of Lebanese banks’ international operations will continue to grow. For now, however, more patience will be required until the domestic economy is able to achieve its full upside potential. When this occurs, in tandem with their success overseas, Lebanon’s banks could be looking at truly stellar growth.

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Read more about:  Middle East , Lebanon