Is there a country anywhere that has not only withstood the global financial crisis, but has actually benefited from the global meltdown?
“Lebanese banks have done very well in the current environment,” says Joe Sarrouh, executive adviser to the chairman of Fransabank. “We have seen a significant inflow of transfers to the banking sector and a major conversion from foreign to local currency.”
Mr Sarrouh highlights the level of dollarisation of the Lebanese economy, which has shrunk from a high of 74% before the global crisis to about 68% now. “The market is showing a gap of about 4 basis points (bps) between US dollar and Lebanese pound pricing,” he says.
Since the collapse of Lehman Brothers and the subsequent government takeover of major lending institutions in the US and the UK, Lebanese depositors have lost confidence in foreign banks. Hence, funds have been pouring into the country’s local banks, which are now enjoying record levels of profits and liquidity. These inflows have enabled the banks to boost their lending to the domestic economy by $5bn last year.
Local advantage
Moreover, the country’s 26 or so banking groups have the field pretty much to themselves. The 17 foreign banks operating in Lebanon are finding it increasingly hard to compete in the local market. Not only have Lebanese banks developed highly sophisticated skills and lending and deposit schemes, the country’s B- Positive rating makes foreign bank involvement extremely costly in terms of capital ratios.
“There’s confidence in the Lebanese pound and local interest rates are well above dollar rates,” says Nemeh Sabbagh, executive general manager at BankMed. “People want to benefit from that. In addition, the exchange rate has been stable for many years at 1500 to the dollar and the market expects it to remain at that level.”
Freddie Baz, group chief financial officer at Bank Audi, says the current positive banking environment is the result of two trends.
“The Lebanese are basically an affluent people, with billions of dollars in holdings in foreign banks,” he says. “So when the big global banks were shaken the ensuring crisis of confidence generated withdrawals from these banks and a massive repatriation of funds to Lebanon.”
Central bank control
In the case of Bank Audi, this translated into a 15% increase in the deposit base in 2008, a record level of growth in absolute and relative terms. Mr Baz highlights the role of the Central Bank in immunising the banks from the subprime fallout. “The bank issued strict directives that restricted bank holdings even in investment grade bonds,” he says.
“This has to be taken in conjunction with the historic risk aversion of Lebanese bankers, a legacy of the war years that ultimately enabled us to survive and prosper,” he adds. “If you look at a global map, what you find is that the banks best insulated against this crisis belong to the deposit-rich category. They have a wide funding base related more to customers’ deposits than to borrowings in the market.
“Being a boring bank pays in today’s environment. We are not sophisticated in complex products but are very much so in terms of management.”
Indeed, Lebanon has proved that classic banking is still a winning model. Its three big banks reported an average 22% increase in profits in 2008, while the outlook for this year – admittedly a more difficult time even for Lebanese banks – is for flat or marginally higher net income.
“This is a year for caution,” says Saad Azhari, chairman of Blom Bank. “One of our competitive advantages is the stress we have always placed on risk control and costs, and this has never been more important than now. The focus for 2009 is very much on risks and costs rather than gaining more market share. This strategy has enabled us to report a cost-to-income rate below 40% last year, compared with a sector average of more than 50%, while our return on equity was 20% – versus 14% to 15% for the rest of the industry.”
Apart from the obvious fact that the banks’ liquidity holdings earn them comparatively little income, other potential negatives are starting to appear on the horizon, making caution all the more crucial a catchword for local banks in 2009. The market reacted favourably last year when Lebanon’s hostile political factions pulled back from the brink of open warfare. The Doha agreement signed in May 2008 paved the way for the election of a new president, the formation of a national unity government and the passage of a new electoral law in advance of the parliamentary elections to be held this coming May. On the back of this settlement, rating agency Moody’s Investors Services changed its outlook on Lebanon from ‘stable’ to ‘positive’.
“Despite these improvements, Lebanon still has substantial credit risks,” says Moody’s sovereign analyst Tristan Cooper. “The political situation is fragile and tensions could resurface before the parliamentary elections. There is also the looming threat of renewed conflict between Israel and Hezbollah. A return to serious political turmoil would quickly set back the economy and could lead to a withdrawal of bank deposits, although these have been highly resistant to political shocks in the past, as have the government’s poor finances.”
Reforms threatened
Among the immediate victims of Lebanon’s political instability are the economic reforms that are required to put the government’s weak public finances on a sustainable path and achieve near-potential levels of growth. Privatisation is another issue that has been put on the back-burner. The government has put a freeze on the telecommunications privatisation and raised public sector wages, actions that in 2009 will widen the budget deficit and increase government debt. Riad Salameh, governor of the Central Bank, has already voiced his scepticism that any reforms will be implemented before May’s election (see interview, Riad Salameh).
Yet the country, which has been invaded by some 150 foreign armies since the Phoenicians began trading on its shores 7000 years ago, has always shown an extraordinary ability to bounce back. In its 66-year history as an independent nation, Lebanon has endured 15 years of civil war, which all but ended its position as a Middle Eastern entrepôt and banking hub. Even today the army has extended its authority only over about two-thirds of the country. In 2005, former prime minister Rafiq Hariri and 22 others were assassinated, and this was followed by a month-long conflict with Israel the following year.
In 2007, Lebanese politicians were unable to agree on a successor to Emile Lahud when he stepped down as president, creating a political vacuum until the election of army commander Michel Suleiman in May 2008 and the formation of the new unity government in July.
Managing uncertainty
“The banking systems showed great resistance during the war years,” says Mr Baz. “This taught us to manage uncertainties, unlike most bankers, who are used to managing certainties. During the war, our main concern was to staff every branch each day to prove to our customers that we were open for business. This was sometimes done under sniper fire.”
The banks continue to diversify through international business. Eleven Lebanese banks, with combined assets of $1.18bn, are active in the Middle East, a trend that started six years ago as part of a strategy to reduce the banks’ dependence on the comparatively small and highly competitive domestic market. Foreign expansion is also a way to decrease the banks’ dependence on Lebanese Treasury bills and Eurobonds in order to avoid further exposure to the public debt. The banks now hold an average of 30% of their assets in pure cash and short-term money-market funds, while 23% is in deposits with the Central Bank and government Eurobonds, and the rest in the private sector.
“Our international business is a key part of our strategy,” says BankMed’s Mr Sabbagh. “In 2007, we acquired a bank in Turkey through a joint venture with Arab Bank. We have management responsibility for the bank and we consolidate [the Turkish bank] with BankMed. We also have a bank in Geneva that is involved in asset management, as well as a branch in Cyprus.
“Last September we set up an investment company in Saudi Arabia. Saudi Med Investment Company was granted its licence last year and it is involved in corporate finance advisory services as well as asset management. Saudi Arabia is a strategic investment for us, given the significance of the Saudi market in the region and our historically close knowledge and commitment to the market,” he adds.
Mr Azhari at Blom Bank says it is expanding its branch network in Egypt, Saudi Arabia and Syria, as well as at home. Meanwhile, Fransabank says its business expansion strategy revolves around establishing and growing a presence in the region and beyond. Fransabank was the first Lebanese bank to go into Algeria and is now active in France, Libya, Sudan, Syria, Belarus and Iraq.
Bank Audi says it is applying for a licence to operate in Algeria as well as Iraq, which Mr Baz describes as “heaven” compared with Lebanon in the war years of the 1980s.
Gulf concerns
One area of major concern this year is how the financial crisis will affect the Gulf region, which is Lebanon’s major trading partner. A serious slowdown is looming in the region, though it is unlikely to slip into recession, according to Fransabank’s Mr Sarrouh.
“The Gulf Co-operation Council (GCC) countries used to grow by 8% to 9% a year but they would be lucky to achieve 3% in 2009,” he says. “We are witnessing a meltdown in wealth, property development in Dubai is nearly at a standstill and most of their people are imported – hence no people means no spending.”
More than 500,000 Lebanese citizens are currently working abroad, mostly in the Gulf, and there are serious concerns of an exodus from these countries as their economies start to dry up. So far, only about 10% of these expats have returned to Lebanon and they are overwhelmingly professional
workers who are easily absorbed into the domestic economy.
“A considerable part of our trade and finance is with the region,” says Mr Baz. “Our exports amount to roughly $3bn and most of that goes to the GCC countries. So any serious downturn in consumption in those economies will have an impact on us – though Lebanese exports are relatively limited as a percentage of GDP.”
The exodus of expats, on the other hand, is a phenomenon likened to Scotland’s fabled Loch Ness monster. “Everyone is mythical about it, yet so far no one has seen it,” says Mr Baz. “We’re the top bank in Lebanon and if 30,000 Lebanese in the Gulf are suffering, we should have received 2000 or 3000 job applications, but this has not happened. But if the white collar workers’ income is affected by the downturn, it could have a negative impact on the transfer of inflows.”
Tourism earnings
Lebanon’s tourism industry is a significant foreign exchange earner and the bulk of these inflows also comes from GCC countries. There is a fear that if austerity takes hold this year, not only tourism but investment in land and real estate by Gulf Arabs will suffer. Bankers take comfort in the fact that exports, expat inflows and tourism revenues represent only 30% of the country’s economy and that a 10% to 15% decrease in foreign earnings would represent a 4% to 5% decline in the overall economy.
But given the potential for economic weakening and the uncertainties of an election year, and the ever-present threat of Arab-Israeli conflict, the banks can be expected to put their tight risk management strategies on red alert.
The local view: Nemeh Sabbagh, Executive General Manager, BankMed
There has been growth in liquidity throughout 2008 across the banking sector and a shift from dollar liquidity to Lebanese pounds, to benefit from higher interest rates. As a consequence, the dollarisation ratio in the banking systems has dropped from about 78% to 68%.
In terms of our strategy, BankMed is focusing on our main lines of business. Corporate business has historically been a major part of our bank. In the 1990s, with the reconstruction of Beirut, all the major projects were financed by BankMed. In the past few years, we have been significantly strengthening the retail side of the business, and relocated and renovated branches. We have new services such as online, interactive voice response and phone banking systems. We’ve heavily promoted consumer lending and credit cards. Hence retail is becoming an important profit generator.
Treasury is the third leg of our strategy and has played a key role in terms of liquidity and asset liability management. Relatively new is Med Securities. Started in 2006, it has become an important profit contributor. It is involved in international securities brokerage and development of investment products we sell to our clients in Lebanon and outside. This has been a very successful segment of the business.
We are the fourth largest bank in Lebanon. Our competitive advantage on the corporate lending side is the historical strength of the bank.
We have always been strong in working with all the major groups in Lebanon and involved in all the major development projects. The retail business is something we only began building up a couple of years ago, but I would say that our advantage is that our people are top-notch professionals. We are familiar with modern retail banking in large markets.
As for the political situation in the region, Lebanon has had its ups and downs. In 2008, apart from the events in May, we had a pretty good year. Gross domestic product growth was up close to 8% and Arab tourists from the Gulf would drive to the country.
In terms of new large-scale projects, we probably have to wait for the situation to settle. But this is more a reflection of the world economic crisis than the political situation here.
COUNTRY FACTS
Population3,971,941
Population growth rate1.15%
Area10,230 sq km
Real GDP growth4.4%
Growth per capita$11,100
Current account-$4.344bn
Key sectors• Services: 75.8%• Industry: 19.1%• Agriculture: 5.1%
Labour force1.5 million
Unemployment rate20%
Source: CIA World Factbook, 2009