The odds, it seems, are perpetually stacked against Lebanon’s banks. If political uncertainties in their domestic market, conflict in the wider region and an ongoing refugee crisis are not enough, the country’s lenders are also contending with onerous changes to the country’s tax regime and currency volatility in regional markets to which they are exposed.
This bitter cocktail is proving hard to swallow. Some lenders are beginning to feel the pinch, while others have found new and innovative ways to secure their future growth. For a sector that has weathered decades of pressure relatively well, this varied picture reflects the degree to which its current woes are acting as a drag on its potential.
“There are a number of risks or challenges facing the Lebanese banking sector today,” says Saad Azhari, chairman and general manager of Blom Bank, one of the country’s largest lenders. “At the forefront, and no question about it, is the difficult economic situation characterised by low growth, high deficits and debt, and rising risk premiums.”
In 2018, real gross domestic product growth is estimated to have expanded by just 0.2%, according to data from the World Bank. This nearly stagnant environment fed through to the performance of the country’s leading banks, known as the ‘Alpha Group’ (with $2bn or more in deposits), with their cumulative net profits dropping by 5.52% year on year, according to research from
Blominvest Bank. In tandem, the Alpha Group’s return on average assets decreased to 0.91% from 1.5%, while the return on average equity also fell from 11.26% to 10.31% over the same period.
Profit restrictions
For the time being there is little prospect of a reprieve on the horizon. “Lebanese banks’ profitability will be under pressure,” says Alexios Philippides, associate vice-president and analyst at ratings agency Moody’s. “Higher funding costs, subdued new business and higher provisions – from low levels – will challenge profits. Large banks will seek to mitigate these factors through cost control supported by digitalisation, and growth abroad.”
A changing tax regime is also denting the profitability of Lebanese banks. Lenders in the country are effectively subject to double taxation, covering both their profits and interest generated on customer deposits. These levies were increased in 2018 with the tax on profits rising to 17% from 15%, while the figure on deposits increased to 7% from 5%. This could worsen, however, given that the Lebanese finance ministry is pushing to raise the tax on deposits further, to 10%, as it tries to strengthen the government’s fiscal position.
Joseph Torbey, chairman of the Association of Banks in Lebanon, spoke out against these plans at an economic conference in Beirut in May. Mr Torbey noted that any tax increase would negatively affect capital inflows to Lebanon and hinder banks’ capacity to finance the economy. Given that Lebanese banks, through deposit inflows from the diaspora, effectively finance the country’s fiscal and current account deficits, any meaningful and sustained reduction of inflows could have serious implications for the wider economy.
Defying the odds
But even as these taxes have taken their toll, some Lebanese banks have bucked the trend and found a way to secure growth. The country’s largest lender by total assets, Bank Audi, is a case in point. Net profits grew by 8% over 2018 to reach $501m. The bank’s performance is largely attributable to its efforts to reduce costs. Consolidated general operating expenses decreased year on year in 2018 by $80.8m. According to group strategy director and board vice-chair Freddie Baz, this feat forms one of the core pillars of the bank’s performance management strategy.
“Despite all the headwinds, the bank has been facing in its most important markets, we have performed quite well thanks to our performance management strategy,” says Mr Baz. “Among other things, this has focused on rebalancing our customer deposit and loan portfolios towards core and fundamental relationships, instead of just adding new risk to the balance sheet.
“Our consolidated loan portfolio has decreased by $3bn over the past three years. Some relationship managers on the asset side of the balance sheet have been converted into collection teams focusing on improving the quality of the bank’s loans, securing timely collections and improving collaterals in order to support loan quality in more challenging conditions.”
These factors, among others, contributed to Bank Audi recording the highest growth in net profits among Lebanese banks in 2018. According to Mr Baz, this came despite the lender’s Turkish unit, Odeabank, allocating most of its profits as precautionary provisions, while the group as a whole incurred additional tax expenses to the tune of $106m.
Blom blossoms
Blom Bank, Lebanon’s second largest lender by total assets, also enjoyed a strong year in 2018. It recorded the highest net profit of any Lebanese bank at $510.42m, accompanied by year-on-year growth of 5.18%.
“Three factors were behind this performance, despite the higher taxes and limited growth opportunities,” says Mr Azhari. “First, the bank’s net interest margin was successfully maintained at 2.4%. Second, our cost-cutting measures and high managerial efficiency were instrumental in reducing the cost-to-income ratio to 35.3%, the lowest among listed banks. Third, we had success in shoring up our foreign operations – especially in Egypt – which now contribute 42% of our loan activities.”
Blom Bank, in common with other Lebanese lenders, is investing in digital capabilities to improve customer service and deliver cost reductions over the long term. This applies to both customer-facing services and back-office processes. “Our digital transformation is on track and is gathering pace,” says Mr Azhari. “In 2018, our various ATM services show a 13.2% increase on 2017; our online/mobile eBlom services saw a 38.9% increase; while our branch services saw a 4% decrease.”
For Lebanese lenders, these investments are starting to bear fruit. According to Moody’s, which rates Blom Bank, Bank Audi and Byblos Bank, the three institutions had an aggregate cost-to-income ratio of 44% in 2018, down from 49% in 2017. The passage of a digital transaction law in October 2018 will also assist the banking sector’s efforts to cut costs. The law essentially equates digital signatures and documents with their paper-based equivalents. Over time, this should help to migrate banking transactions to digital channels while lowering banks’ acquisition costs for new customers, according to Moody’s.
Carrying the card
Indeed, developments of this sort are also delivering tangible improvements to customers’ banking experiences across Lebanon. Headline-grabbing initiatives from the lenders themselves are now a common occurrence. Fransabank, one of Lebanon’s leading banks, has for instance launched the country’s first biometric card, in conjunction with Mastercard.
“The rollout of innovative technologies reflects the bank’s leading role and commitment to driving change in our local market and in the banking sector in particular,” says Fransabank general manager Nadim Kassar.
“With Mastercard we launched the first biometric card in the Levant. Fransabank cardholders were the first in the Lebanese market to benefit from the most advanced authentication technology available, allowing cardholders to authenticate in-store payments in seconds with their fingerprints,” he adds.
For its part, in April 2019 Bank Audi launched a WhatsApp business solution as a means of improving its customer service offering. The bank’s customers can now chat with live agents to receive personalised support and explore new products and services. “Bank Audi is constantly developing digital banking solutions to meet the needs of a sophisticated customer base,” says Mr Baz.
Egyptian promise
With opportunities for growth in the domestic market seeming limited in the coming years, most Lebanese banks see a more promising outlook for their overseas operations. Although markets such as Turkey have been hit hard by currency volatility and political uncertainty, affecting lenders such as Bank Audi that are present there, other markets have maintained their attractiveness. Egypt is a good example: with a stable government in power that is enacting market-friendly reforms, opportunities for growth are abundant.
“[Blom Bank] will increase the contribution of our foreign units to net profit and revenues, especially in the Gulf and, again, Egypt where we expect to have 47 branches by the end of 2019,” says Mr Azhari. “We hope to realise more synergies from our different activities across a wide range of countries, especially for Lebanese customers with businesses in Europe, the Gulf and Egypt.”
Bank Audi is expanding its presence in Egypt through the acquisition of the National Bank of Greece’s in-country unit. The deal, announced in May 2019, will see the Lebanese lender acquire 17 branches in the country as well as the Greek bank’s corporate and retail assets and liabilities. The transaction is structured as a single sale and remains subject to regulatory approval from the central banks of Greece and Lebanon. The deal follows a strong year for Bank Audi in Egypt. Its Egyptian business saw net profits climb by 24% in 2018, as total assets surged by 21.7%.
“Our rated banks’ overseas operations accounted for about 20% of their revenue in 2018,” says Moody’s Mr Philippides. “We expect some key operations abroad, such as in Egypt, to perform well, providing some relief from domestic profitability challenges while also supporting revenue diversification.”
China on a plate
But beyond Lebanese banks’ regional operations, some lenders are looking further afield to generate new business opportunities. In particular, Fransabank is pushing hard to leverage the unique relationship that is has cultivated with China. “Fransabank was the first Arab bank to establish a China desk, dedicated to serve banking and finance needs of our clients dealing with China, and Chinese companies dealing in our markets, through competitive and reliable bank payments and trade finance operations,” says Mr Kassar.
In 2018 Fransabank was one of four Arab banks, and the only Lebanese lender, to launch the China Arab Countries Interbank Association. The association was established with a $3bn special fund from the China Development Bank to support financial collaboration and to finance key projects between China and Arab states. “Fransabank seeks to advance Sino-Lebanese business, trade and investment ties,” says Mr Kassar. “This role relates to advisory and support services, spurred by Fransabank having signed memoranda of understanding with important Chinese entities, chambers and associations [among other initiatives].”
The innovative and outward-looking approach adopted by most of Lebanon’s larger banks should stand them in good stead over the coming years. Even as some endure difficulties in their overseas operations, these problems are likely to be short term in nature. Meanwhile, at home, a new government with its mind on economic reform might inject some optimism into the country, if it can overcome the array of political and social obstacles to achieving change. By doing so, it could also unlock the $11bn in support promised by international donors, which remains contingent on the government executing these reforms. But if the Lebanese authorities fail in this endeavour, the country’s economic situation could easily spiral in a negative direction.
“I am still very hopeful that the economy will recover in the medium term, and stay steady,” says Mr Azhari. “Economic reforms are always difficult to implement because of their unpopularity, and they could also be recessionary. But their impact could be very positive in the medium to long term; especially, as in the case of Lebanon, if they are accompanied by assistance and development funds.”
