The Beirut banking fraternity will look back on 2005 with distinctly mixed feelings. The St Valentine’s Day assassination of former prime minister Rafiq Hariri robbed Lebanon of the central figure behind its post-civil war renaissance, yet the aftermath – with international and domestic pressure successfully applied on Syria to withdraw its troops – has restored confidence in the country’s ability to shape its own future independent of outside interference.
Bankers see this year as providing the foundation stone for long-term growth. They are drawing particular comfort from the expressions of support elicited at the New York United Nations summit meeting in September, with promises of further aid to support Lebanon’s heavily indebted economy.
Markets remain open. On October 7, bankers reported that strong foreign demand meant the government’s new $750m Eurobond, which carries an 8.5% coupon and matures in January 2016, was several times oversubscribed. The issue, which is due to be listed in Beirut and Luxembourg, and which is lead-managed by the local Bank Audi and Banque de la Mediterranée with Citigroup, will be used by the finance ministry to cover maturing debt.
Political repercussions
Politics matter in Lebanon, and even Beirut’s resilient institutions felt the immediate economic impact of Mr Hariri’s killing, as was evident in Lebanese banks’ first half performances. Aggregate banking activity in January-June, measured by total assets, declined by 2.2%. Customer deposits shrank by 4% in the first quarter of 2005, having grown by 13% in the first six months of 2004.
This was after the profits of the leading commercial banks grew nearly 12% in 2004, despite an ongoing decline in net interest income.
It was notable that in the turbulent period following Mr Hariri’s death, senior bankers quickly mobilised to lobby officials and power-brokers, including parliamentary speaker Nabih Berri, to speed up the formation of a new government that might stabilise the situation.
Time of transition
“This is a transitory year for Lebanon,” says Marwan Barakat, head of research at Bank Audi. “Since the Hariri assassination, there has been the withdrawal of Syrian forces, parliamentary elections and the appointment of a new government. A lot of things have happened and inevitably this will have an economic cost. Banks are looking at a no-growth year, which is a direct repercussion of the assassination.”
With loan demand closely tied to the economy’s performance, the first three quarters of 2005 witnessed somewhat anaemic credit growth. According to the Association of Banks in Lebanon (ABL), the increase in loans to the resident private sector was close to zero in the first eight months, compared with a nominal growth rate of 3% for the same period in 2004.
Revival signs
The new bond is a reflection of an upturn. Lebanese bankers canvassed by The Banker were confident that activity was picking up. Deposits at commercial banks jumped by more than $1bn in July – the highest monthly growth since end-2004. Banks have also noted a surge in non-resident deposits, suggesting a revival in confidence in Lebanon’s economic prospects.
Bankers are bullish about their chances of expanding their business lines and securing new growth opportunities. Lebanese banks have traditionally enjoyed a high sovereign exposure – financing the government’s prodigious public debt, estimated at more than $36bn – but they are now looking for ways to scale back their exposure to the public sector, which ties in with a government reform agenda that envisages reduced indebtedness and fewer borrowing requirements.
At Byblos Bank, one of Lebanon’s ‘big three’ banks, exposure in the high return Lebanese government securities as a percentage of total assets has fallen from 30.1% at end-September 2003 to 22.2% at end-September 2004. Fee and commission-based income is rising, mitigating the downward pressure on net interest margins.
In the past couple of years, non-interest income has increased as a share of Lebanese banks’ total operating income from 31% in 2003 to 33% in 2004. Extended retail franchises and a greater specialisation in capital markets have served them well. “The capital market is now more active and banks are busy trading in local paper,” says Joe Sarrouh, adviser to the chairman of Fransabank.
Banks are also poised to benefit from the burgeoning financing needs of the Lebanese private sector, which will help them overcome their addiction to funding the country’s public debt.
The government is trying to reduce the debt burden. In the run-up to the IMF/World Bank annual meetings, prime minister Fouad Siniora said: “What we seek is aid to reduce the burden of debt servicing so that the Lebanese economy can have breathingspace and direct its resources to productive sectors.”
Cross-border moves
With a combined asset base of more than $68bn, equivalent to three-and-a-half times the country’s gross domestic product, the biggest opportunities for Beirut’s banks may lie beyond Lebanon’s borders. The biggest players are pursuing ambitious regional expansion strategies, aimed at plugging in to the huge surge of liquidity coming from the oil-producing Gulf states.
Having spent years modernising and restructuring their operations, banks are now looking for ways to extend their regional footprint. “The Lebanese banking industry is well positioned to export banking and financial services abroad, mainly to neighbouring and regional economies,” says Makram Sader, general secretary of the ABL.
This footprint has taken in neighbouring Syria, Jordan, Sudan, Algeria and most recently Egypt. Lebanon’s largest bank, BLOM Bank, received Central Bank of Egypt approval in early October to buy Egyptian/ Romanian joint venture Misr Romanian Bank, in the latest stage of Cairo’s privatisation programme. The deal could be worth about $100m if, as the bank would like, BLOM follows up its initial purchase of 33.26% of Misr Romanian’s equity by purchasing the other two-thirds share, which is currently part-controlled by the Egyptian government. This may be possible when Cairo enters phase two of the Misr Romania divestment with an initial public offering (IPO) and listing on the Egyptian Stock Exchange.
BLOM has been aggressive in its efforts to grow outside Lebanon to diversify its sources of income and boost profitability. It already has a strong Syrian presence and has a series of branches in Jordan.
Others have followed suit. In July, Bank Audi obtained a licence to launch activities in Syria under the Bank Audi Syria brand, following the opening of its first Jordanian branches last year. Byblos Bank opened a branch in the Sudanese capital Khartoum last year.
“The diversification of business lines has enabled banks to export their services to neighbouring countries,” says Mr Barakat. “The fact that the size of the asset base is so large compared with the domestic economy means that regional expansion really imposes itself.”
Consolidation
With more than 60 banks operating in a country with a population of little more than four million, the consolidation process is continuing. In one of the biggest recent deals, Bank Audi merged with Bank Saradar in June 2004, enabling the combined entity to close in on BLOM’s market lead. The local market is now strongly concentrated, with the top 10 banks having about 75% of the market share. Legislative changes should allow for further consolidation in the sector.
Banks have largely averted any serious deterioration in the quality of loan portfolios, helped by an extensive risk coverage policy. Non-performing loan ratios have improved, assisted by the strengthening economic situation in recent years. The ratio of doubtful loans to total loans declined from 24.3% in December 2003 to 21.3% in December 2004. Bankers boast of well-provisioned lending portfolios. Deducting loan loss provisions, net doubtful loans as a percentage of total loans amounted to 4% last year, which is below the regional average though slightly higher than the emerging market median.
Lebanese bankers have long prospered in difficult conditions. Now that the country’s political fortunes are looking up – despite continuing political assassinations and simmering sectarian tensions – Beirut’s financial community sees little reason for pessimism.
