Lebanon’s economy is well known for its resilience. But the past couple of years have proven to be more testing than most. A combination of political instability, a civil war raging in neighbouring Syria, the region’s changing political and economic landscape in the aftermath of the Arab Spring, and the broader global financial crisis, have all taken their toll on the Lebanese economy.
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The small Middle Eastern country experienced rapid growth in its gross domestic product (GDP) of about 8% in the four years until 2011, before slowing to just 2% in 2012, according to the International Monetary Fund (IMF), which is forecasting a marginal improvement of 2% to 2.5% in 2013.
Budget deficit
Lebanon’s budget deficit jumped 67% in 2012 to $3.93bn and the country logged its first primary deficit – by which government finances are in deficit before debts are paid – since 2006, according to the IMF.
Inevitably, such a negative macro-performance has dampened the performance of the country's banking sector. Although total assets grew by 8% to reach $151.9bn at the end of 2012 (compared with growth of 9% in 2011) and total deposits increased by 8% to reach $125bn in 2012 (compared with 7.9% in 2011), the $4.1bn growth in lending during 2012 was 8% lower than 2011.
The growing pressures on spreads and margins, slow fee income growth and growing provisioning requirements against any spillover from neighbouring countries resulted in a 0.6% contraction in net profits across the banking sector in 2012.
“A couple of years ago, Syria was our second most profitable market after Lebanon,” says Saad Azhari, chairman and general manager of Blom Bank. “Today, all our Syrian profits are taken as provisions and we have quite substantially reduced the size of our subsidiary there.”
Blom Bank’s Syrian deposits fell from $1.8bn in March 2011 to $600m in March 2013, while its loans fell from $650m to $120m over the same period, especially impacted by the slowdown in trade finance activity.
Lebanon’s Fransabank has been similarly impacted. “The security environment which has prevailed in Syria in the past two years has resulted in a significant downscaling in Fransabank Syria,” says Nadim Kassar, general manager of Fransabank. “Our general provisions taken for unforeseen and non-identified general risks in Syria stand at $23m.”
Cloudy outlook
The outlook on the domestic front remains negative, with the ongoing conflict in Syria and Lebanon's factious domestic politics expected to continue to adversely affect key sectors of the country's economy – trade, tourism, real estate and construction – over the next 12 to 18 months. On April 30, 2013, a report from international ratings agency Moody's affirmed its outlook on Lebanon's banking system.
“The outlook for Lebanon's banking system remains negative, as it has been since 2011. The outlook reflects Moody’s expectations of weak economic growth in Lebanon, modest capital buffers, considering the banks' high exposures to the low-rated (B1 stable) Lebanese sovereign (estimated at 42% of system assets in December 2012), the high likelihood of further asset-quality deterioration and declining net profitability, primarily due to higher provisioning needs and subdued business generation. As a reflection of the challenging environment, Moody's expects that Lebanon will record muted credit growth in 2013 (of 8% to 10% nominally, against projected inflation of 5.7%),” says the report.
Compounding all these issues is the stiff local competition. Lebanon has the 13th highest bank penetration rate worldwide, with 97 branches per 1000 square kilometres, according to the IMF.
International target
Against this backdrop, it is not surprising that Lebanese banks have increasingly been looking beyond their home soil to create new revenue streams, diversify their assets and dilute credit risk. Now firmly on their radar is Iraq, with Lebanon’s four key players either having already established a presence there, or making plans to enter shortly.
Blom Bank has recently been granted approval to open two branches in Iraq – in Baghdad and Erbil (the capital of the northern region of Kurdistan) – which will open in the second half of 2013. Similarly, Fransabank is in the final stages of establishing a presence in Iraq and is also targeting the two cities of Baghdad and Erbil, where it expects both branches to be operational by the third quarter of 2013.
Meanwhile, Byblos Bank opened its third branch in Iraq in March 2012 to strengthen its activities in corporate, commercial and correspondent banking, especially transfers and trade finance. Bank Audi, Lebanon’s largest bank by asset size, is looking to enter Iraq in the near future, focusing on the central and southern cities of Baghdad and Basra, as well as on northern Kurdistan.
Turkey strategy
Away from Iraq, Audi’s key focus is on Turkey after it became the first foreign bank in 12 years to be awarded a licence in October 2011. “Since the onset of the Arab Spring, Bank Audi has started to shift its strategy from just the Middle East and north Africa region to the Menat [Middle East, north Africa and Turkey],” says Freddie Baz, group chief financial officer and strategy director at Bank Audi.
“We have started focusing on south-east Mediterranean countries as we don’t foresee important growth coming out of our other near-east markets such as Syria and Jordan in the near future,” he adds. (During 2012, Bank Audi Syria recorded a loss of $516m in assets, a loss of $454m in deposits and a loss of $253m in loans.)
Bank Audi Group, whose assets stood at $31.3bn at the end of 2012, opened the doors of its Turkish subsidiary, Odeabank, in November 2012 with $300m of share capital and has since opened eight branches – six in Istanbul, one in the capital Ankara and one in Izmir.
It plans to open another 20 branches throughout Turkey’s larger cities in 2013, and then expand to 100 outlets in the next five years, with the aim of becoming one of the top 15 banks in Turkey by the end of 2017. “We have an ambitious plan for Odeabank, which is to build a franchise ranking second to Lebanon in terms of size of assets and earnings by 2017,” says Mr Baz.
Remarkable growth
The early signs of Bank Audi's performance in Turkey are promising. Odeabank recorded remarkable growth in its first five months of operation, building $4.3bn of assets, $3.6bn of customer deposits and $2.1bn of loans. The $4.3bn assets constitute 13% of Bank Audi Group’s total assets as of the end of March 2013.
“To put things in perspective, this means we have achieved more growth in Turkey in the first quarter of 2013 than was achieved across the entire consolidated banking sector in Lebanon,” says Mr Baz. “We aren’t just focusing on the middle corporate segment. There are some Turkish companies looking for deals with a very big ticket so we are participating in those deals by booking a part in our books in Lebanon.”
Odeabank offers retail, commercial and corporate banking and is currently working on its credit card offering. Audi appointed Hüseyin Özkaya, the former head of HSBC’s Russia operations, as the chief executive. Several senior executives coming from tier-one banks also joined.
“Our aim in going to Turkey relates to our regional expansion strategy to harness the exponential growth in trade flows. Turkey’s trade flows stood at $6bn in 2003; by 2012, they had grown to $47bn. For a bank, that represents yearly letters of credit commissions amounting to $500m. This is the rationale for having a presence in Turkey. We cannot neglect such an important turnover,” says Mr Baz.
According to Mr Baz, that $47bn represents only 1.8% of the total trade between Turkey and the Arab world that stands at $2500bn. “If that grows to 5% to 6%, you can imagine how great the financial prospects are.”
Regional powerhouse
Since the turn of the century, Turkey’s economy has fast emerged as a regional powerhouse, with its $783.1bn GDP comprising one-third of the GDP of the entire Arab world, and a 75 million population that accounts for 22% of the consolidated Arab market. Today, Turkey ranks as Europe’s fastest growing economy, reaching an average 8.4% a year between 2010 and 2012.
However, Lebanese banks are also pushing further afield than just the Menat region and into European and African countries. For example, outside Lebanon, Fransabank also has subsidiaries in France (since 1984), Algeria (since 2006), Belarus (since 2008), Syria (since 2009) and Cyprus, where it opened in 2011. It also opened an associate bank in Sudan in 2006 and representative offices in Libya in 2008 and Abu Dhabi in 2012.
“Our best-performing subsidiaries are Fransabank El Djazaïr in Algeria and Fransabank (France), in addition to our associate bank in Sudan, United Capital Bank. The performances are mainly driven by the favourable economic conditions in these countries, whereby we have managed to acquire a good market share, mainly in trade finance,” says Mr Kassar.
Fransabank El Djazaïr’s net profits in 2012 registered $13.32m, compared with $8.36m for 2011, an increase of 59%, with total assets of $300m. Meanwhile, United Capital Bank recorded net profits of $12.85m in 2012, despite the currency devaluation versus the US dollar. Its total assets stood at $251m.
Fransabank’s most recent overseas venture was to open a representative office in Abu Dhabi. “Abu Dhabi is a very promising business centre and there are about 500,000 Lebanese working and living in the Gulf Co-operation Council [GCC] countries. We are looking to serve the Lebanese, as well as the international and local companies, operating in this growing and dynamic market,” says Mr Kassar.
Blom’s UAE presence
Blom Bank, whose international business represents $5.8bn of its consolidated assets of $25bn, has also been working to establish a strong presence in the United Arab Emirates, as well as the broader GCC.
Currently, it operates branches in the emirates of Dubai and Sharjah, as well as a representative office in Abu Dhabi. Since 2008, it also has been operating in Saudi Arabia through Blominvest Saudi Arabia, a firm that specialises in investment and private banking, which has a corporate bank in Qatar located in the Qatar Financial Centre (QFC).
“We are in the process of trying to convert our Abu Dhabi office into a branch,” says Mr Azhari. “And we are also looking at expanding our business in Qatar. Now that the QFC regulatory authority is merging with the Qatar Central Bank, we will hopefully be able to expand and upgrade our activities there. Our investment bank in Saudi Arabia is doing very well but we would also like to open a commercial one, once restrictions on commercial licences are lifted.”
In July 2011, Blominvest launched the $11m Blom Saudi Arabia fund focused on leading Saudi equities with a target of assets under management of $25m. As of April 15, 2013, the figure stood at $15.9m.
“We launched our fund management business in 2009 and today we are managing more than $500m in funds. We’re a leader in the funds industry and it is generating a very good commission for us as there are few other Lebanese banks doing this,” says Mr Azhari.
However, the country where Blom has an increasing overseas footprint is Jordan, where it operates 11 branches, with a 12th due to open in a few months. It has enjoyed particular success in the retail lending space. Its total car loans (including interest) amounted to $211m as of the end of March 2013, while its total outstanding housing loans reached $186.5m at the same date. Its car loans comprise roughly a 45% market share while its housing loans equal roughly 5%.
“We’ve been successfully gaining market share, even though the Jordanian market has been growing very slowly. I think that’s because we established a presence there in 2004 so we’ve been there some time now and understand the market,” says Mr Azhari.
Destination Egypt
Of course, another market that Lebanese banks have not failed to overlook is Egypt. As is the case with Turkey, Egypt represents a key market for any bank that wants to be a strong regional player. Blom already has a presence there through Blom Bank Egypt, a commercial bank through which it operates 26 branches and which comprises 6.7% of the bank’s total assets.
“We’ve grown strongly in Egypt,” says Mr Azhari. “On the whole, Lebanese banks have been very successful in the country and have been able to provide better products. However, in Egypt in 2012, we were very conservative and took a lot of provisions to have almost full coverage of our non-performing loans. The bank still managed to record net profits of $10.93m, a 3.26% rise on 2011 figures. We expect in 2013, even with the uncertain economic conditions, to achieve much better results.”
Bank Audi, meanwhile, established its Egyptian subsidiary in 2006 and operates 32 branches. Its assets stood at $3.4bn at the end of 2012, with deposits of $2.6bn and loans of $1.5bn.
“There’s huge potential in Egypt as banking coverage ratios are still weak. I think one of the triggers of the Egyptian revolution was the failure of a provision of adequate and affordable access to financial services,” says Mr Baz.
Indeed, it is estimated that only 10% of Egypt’s population has a bank account. Retail lending is less than 10% of GDP, compared with 50% or higher in developed markets.
“We believe that Egypt is too big to fail given its fundamentals – the size of the population and the strategic importance of the country. It is going through difficult times but we believe it will succeed by ensuring its political transition,” says Mr Baz.
“Our short-term outlook on Egypt isn’t strategic but we believe that on a middle-term outlook of three to five years that it holds a lot of potential. Egypt in 2013 looks a lot like Turkey did in 2002. The same GDP size, macro vulnerabilities, risk profile and similar population size, give or take 10 to 15 million people. If Turkey succeeded in its macro-adjustment, then why shouldn’t Egypt? So we’re looking to consolidate our presence there.”
This confidence in Egypt was reflected in the second half of 2012, when Qatar National Bank purchased Société Générale’s Egyptian subsidiary for $2bn (twice the book value), while Emirates NBD paid $500m for the acquisition of BNP Paribas’s Egypt unit (1.6 times the book value).
“Once we’ve reached our potential in Turkey and resumed growth in Egypt, then we will consider expanding into two places – sub-Saharan Africa and Latin America,” says Mr Baz. “The latter has a very important community from the Levant.”
Pushing and pushing
In light of the adverse domestic operating conditions, continued international expansion and a push into new markets will remain a mainstay of Lebanese banks’ future growth strategies.
“The main challenge of Lebanese banks in 2013 is to build on the resilience they have achieved within unfavourable economic circumstances, and to continue to grow both internally and externally, without compromising on the quality of their assets,” says Mr Kassar.
“Today, our international operations represent 19% of our total consolidated assets, mainly from our Algerian subsidiary and Sudanese associate. We are aiming to raise this figure to between 27% and 30% over the next three years.”
