Lebanese banks shrug off setbacks to stay on path to growth

Navigating through political and financial uncertainty has almost become a way of life for the Lebanese economy. From the 15-year civil war that ended in 1990, to the conflict between Hezbollah and Israel in 2006, political wranglings and soaring public debt, Lebanon certainly does not have the smoothest of histories, and 2011 was no different.

The government of prime minister Saad Hariri collapsed in January 2011, leading to a power vacuum until a new cabinet was formed six months later in July. While Lebanon is accustomed to protracted wrangling over new cabinets, the impasse was unusually fraught as it also delayed the reappointment of Riad Salameh to the post of governor of Banque du Liban – Lebanon’s central bank.

Just as these political roadblocks were being overcome, the uprisings in neighbouring Syria were gaining momentum and the eurozone debt crisis was casting shadows over the health of the global economy.

In simultaneously facing domestic, regional and global challenges, Lebanon saw its economic growth curbed from 7.5% in 2010 to just 2% in 2011 – the slowest pace since 2006. The knock-on effect on the Lebanese banking sector was a slower than average growth rate in 2011 than the previous three years. Lebanese banks’ assets grew at about 9%, deposits by 7.9% and loans by 12%.

Resilient response

But in light of the upheavals, the general consensus among the banking community is that the sector grew at a healthy pace. “Lebanon proved to be extremely resilient during the global financial turmoil and it weathered the storm very well,” says Freddie Baz, group chief financial officer and strategy director at Bank Audi, the country’s largest bank by asset size.

“The country attracted $65bn of inflows between 2007 and 2010, mainly due to remittances and money transfers from the Lebanese diaspora who felt their money was safer at home. In 2011, Lebanese banks witnessed a fall in the rate of deposit growth as inflows decreased by 18% from $17bn in 2010 to $13.9bn, but this needs to be put into perspective. It still allowed for an $8.5bn increase in the banking sector’s deposit base, which is more than enough to ensure the financing of both the domestic private and public sectors,” says Mr Baz.

Indeed, with total deposits currently standing at $115.7bn in a country with a gross domestic product (GDP) of $41.5bn, Lebanese banks have long been the driving force for economic growth in the country. For example, as the behemoth of the sector, Bank Audi’s total assets are equivalent to 55% of the country’s GDP and today it is the country’s largest employer outside of the public sector.

Private sector loan rise

However, banks have been doing a significantly increased amount of lending to the private sector, with such loans growing from 15% in 2009 to 25% in 2010. Lebanese banks extended new waves of loans to the private sector amounting to $4.4bn in 2011. While this figure is 32% below the $6.6bn growth realised in 2010, it remains 15% above the average lending growth of the past five years – an impressive statistic given both the economic and political climate in 2011.

“We had a good sustained rate of growth in our economy from 2007 to 2010 with annual growth averaging 8%,” says Makram Sader, secretary general of the Association of Banks in Lebanon (ABL). “The private sector renewed its faith in the domestic economy and we were following our clientele. Another smaller reason is that the public sector has needed less financing because the public deficit-to-GDP ratio fell substantially from 10.2% in 2007 to 6% in 2011.”

With banks’ loans to the government having reached $30bn, or 77% of the country’s GDP, the central bank Banque du Liban has been trying to diversify the sector’s lending portfolio through new incentives. 

Retail banking therapy

At the end of 2009, Banque du Liban introduced a new law exempting banks from holding reserve requirements on consumer loans, including mortgages. Awash with liquidity and amid the sharp fall in interest rates on deposits, the new law has proven very attractive to the banks that have increasingly been gearing their attention towards retail loans as a way to boost revenues.

Retail banking grew by a substantial 20% in 2011 in Lebanon compared with 2010 and reached a total value of $10.6bn. Banks have been competing for retail loans over the past few years, given the untapped demand from consumers and the rise in real estate prices. Real estate and related activities contributed to 25% of GDP growth during 2005 to 2009, while capital city Beirut’s real estate was valued as one of the most expensive in the region in 2010.

“The most important driver of our business and the segment that experienced the fastest profit growth was housing,” says Saad Azhari, chairman and general manager of Blom Bank, Lebanon’s second largest bank by asset size. “We are the leader in retail banking in Lebanon today and account for roughly 25% of both the housing and car loans in the market.”

Blom Bank’s car loans stood at $445m at the end of 2011, while its housing loans have grown from $330m in 2009 to $536m in 2010 to $738m in 2011.

Credit Libanais is the second largest housing lender in the market with loans of roughly $600m to $650m allocated to this sector. “Credit Libanais is probably lagging behind us by about 10% and it uses almost all its reserves for housing loans,” says Mr Azhari. “Bank of Beirut or Byblos Bank are the second largest provider of car loans and they are maybe half our size.”

Fransabank is also eyeing this market segment. “The emphasis for domestic development is now focused on retail and housing, as well as the middle market of SMEs [small and medium-sized enterprises],” says Nadim Kassar, general manager of Fransabank. The bank is currently working on launching a new product that will facilitate in the purchase of home appliances.

Varied offerings

In their desire to acquire market share, Lebanon’s banks have been actively advertising a wide range of retail products, including housing, car, education and wedding loans, since the start of 2012 – whether on television, radio or on billboards. Banks’ expectations for retail loan demand is expected to remain high this year, especially in light of the fact that personal loan demand is linked to the income levels of individuals, which has been boosted by the rise in salaries.

Banque du Liban figures reveal that retail loans grew from $3.7bn at the end of 2006 to $10.5bn at the end of September 2011. They accounted for roughly 24.5% of utilised credits by the private sector and 7.6% of the banking sector’s total assets in September 2011. Within this segment, housing loans accounted for about 53% of total retail loans at this same date – a reflection of the importance of mortgages in driving the growth of this market.

Blom Bank has also been generating new revenues streams from the asset management side of its business. 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. The objective of the fund is to generate long-term capital growth through investing in equity securities listed on the Tadawul, the Saudi stock exchange, either directly or through other funds or collective investment schemes. It ranked as the second best performing fund out of a total of 18 funds in Saudi Arabia in 2011, according to Zawya, a database that tracks fund performance across the Middle East and north Africa (MENA) region.

In February 2012, Blominvest Saudi Arabia announced the closing of the private placement offering of the Blominvest-Maskan Arabia for Real Estate Development Fund with a total of SR283m ($75.4m) focused on building 400 housing units in Riyadh in collaboration with Maskan Arabia, the project developer.

Blominvest has another three launches in the pipeline, one of which will be an Islamic-focused fund, a sector-specific fund (although the target sector has not yet been disclosed) and one that will cover the MENA region with an initial target of $50m assets under management.

“We launched our fund management business three years ago and it has grown to stand at more than $500m today,” says Mr Azhari. “It is generating a very good commission for us as there are few other Lebanese banks that do this. We have several operations in Lebanon and Saudi Arabia and I am further trying to increase the investment banking and asset management lines of Blom’s operations.”

Corporates’ outside issues

Meanwhile, the health of the Lebanese corporate banking market is more likely to be determined by external economic factors. “Big Lebanese corporates are much more sensitive to the regional business climate. The corporate sector is a much more export-led business so our credit extended to this sector could be affected by what is happening in neighbouring countries whereas retail lending won’t be,” says the ABL’s Mr Sader. “However, the banks will continue to be active in financing Lebanese trade, which has always been a good line of business for them as we don’t receive lots of financing from our trade partners because of perceived risk.”

The country’s exports stood at $6bn in 2011 while imports were at $20bn. At 42%, trade and services comprised the largest share of Fransabank’s loan activity in 2011, followed by retail and housing at 24%, and industry at 17%. Trade finance and industry also continue to be strong business lines for Lebanese banks.

“Our main lending opportunities today are international trade and industry, by which I don’t mean heavy industry, but more areas such as jewellery and wine-making,” says Sami Haddad, general manager of international banking and investment at Byblos Bank. “But we are careful about real estate – we have a relatively limited exposure to real estate in general and certainly in our Lebanese lending portfolio.” 

Neighbour problems

Indeed, some among the banking community are less bullish about the real estate market in light of the ongoing crisis in Syria, which caused an 18.3% decline in property sales to $3.85bn in the first half of 2011 compared with the same period in 2010, according to data from Bank Audi. There were also 230 fewer transactions to foreigners in the first five months of 2011.

The current problems have limited investor appetite for the Lebanese market, in part because neighbouring Syria would normally act as a source of eager purchasers. What is happening across the Syrian border, which is located just 90 kilometres from Beirut, remains very much on the radar of Lebanese banks.

In November 2011, affiliates of seven Lebanese banks operating in Syria issued financial results showing that their aggregate assets reached $7.1bn at the end of September, marking a decrease of 13% from the end of 2010, according to an economic report published by Byblos Bank. The report attributed the decrease to the decline in the assets of Banque Bemo Saudi Fransi, Bank of Syria & Overseas and Bank Audi Syria – the three largest private commercial banks by assets.

“Our strategy in Syria has been much more conservative – we’ve downsized our assets, loans and deposits by almost 55% since the onset of the crisis,” says Bank Audi’s Mr Baz. “We believe that slimmest is healthiest in uncertain times. But, to put things in perspective, Syria represents just 2% of our consolidated assets.”

Mr Haddad at Byblos Bank says: “The negative impact of the Syrian crisis on our bank’s performance is minimal because it represents just 5% of our consolidated balance sheet and we aren’t making any new loans. But the problem is affecting the whole investment climate.”

In 2011, Lebanon’s alpha banks – the 12 banks with deposits in excess of $2bn – allocated net loan loss provisions almost double the size of 2010 as the central bank asked the banks to undergo stress-tests taking into consideration the risks of other countries such as Syria and Egypt. Amid the growing provisioning requirement and pressure on interest margins, they reported a relatively flat profit growth of 1.2% in 2011.

However, such developments have not come at the expense of asset quality. The ratio of Lebanese banks’ doubtful loans to total loans reached a decade low of 3.5% at the end of 2011, which compared favourably with regional and international averages. 

Standing in good stead

Furthermore, unlike their Western counterparts, Lebanon’s banks are highly liquid and well placed to implement Basel III requirements. With primary liquidity ratios accounting for nearly half of customer deposits, many leading banks have declared that they are ready to meet all the requirements now, ahead of the 2015 deadline. On average, 90% of banks’ capital is Tier 1, mainly common equity.

“Due to the fact that we have become accustomed to operating in a risky environment, high liquidity and low return have become the name of the game for Lebanese banks and the sector tends to produce only a moderate return on equity and assets,” says Mr Sader. “Private loan growth has recorded some very high figures and I don’t see its future growth being as fast. I think we are looking at maybe 8% to 10% this year, but that is sufficient to generate good economic growth in 2012.”

Loans to the private sector grew by $1.1bn or 2.7% in the first two months of 2012 to reach $41.8bn. The International Monetary Fund has projected an economic growth of 3.5% in 2012, up from 2% in 2011, and this growth has been reflected so far in the performance of the Lebanese banking sector to date as assets increased by 2.5% in the first two months of 2012 to reach $144.1bn, and deposits by 1.5% to reach $117.4bn against a contraction of 1% in the same period of 2011.