Finance

Despite The Odds

Banking

Lebanese banks remain a retaining wall for the broader economy, mitigating damage from macro and regional noise.

Lebanon’s banking sector is a mainstay of the wider economy and has successfully seen growth, despite the spillover effect of regional strife global financial turbulence. By way of some background, Lebanon has been plagued by debt, which today accounts for 143% of GDP according to the central bank (BDL). Sector data reveals that for the fourth consecutive year, the economy has been rocked by political stalemate over the appointment of a new president and the escalating horror across the Syrian border. Meanwhile, parallel dips in foreign trade, FDI and, importantly, tourism, have compounded the bleak landscape. Lebanon is rated B2 by Moody’s, B by Fitch, and B- by Standard & Poor’s. Earlier in 2015 the latter maintained its country outlook at “Stable.” Moreover, that the economy actually grew 2% in 2014 is testament to the BDL’s prudent fiscal policy, as well as to persisting remittances from the diaspora. The economy had seen 8% annual growth between 2007 and 2010, which has fueled the liquid banking universe. Another factor supportive of the banking system is an undeveloped capital markets culture whereby the banks, rather than equity are turned to when capital needs to be raised. The family-run nature of most businesses is a serious curb on IPOs. As at YE2013 private sector loans extended to resident and non-resident customers amounted to 105% of GDP. The tellingly high figure confirms huge demand to fund investments and to meet retail customers’ consumption needs.

IN NUMBERS

Lebanon’s banking universe is a constellation of 73 institutions, featuring 56 commercial banks—995 branches as of 2014—and 17 investment banks. Lebanon boasts a high bancarization rate, with one bank branch per 5,000 people. As of February 2015 the total assets of the Lebanese banking sector had reached of $176.6 billion, up 0.9% from $175.7 billion in December 2014, and healthily up from $164.8 billion in 2013. Bank deposits had climbed 6% to a fresh high of $151 billion at end-2014, with a dollarization ratio of 65.7%. Yet deposits of $50.6 billion in February of this year were 0.3% down from December’s $50.9 billion. Loans granted to the private sector, while down $360 million YoY, were up 7.5% YoY at end-January to in strong part due to the BDL’s incentives package. Meanwhile, liquidity held in FX was at 42.4% in January 2015. In parallel to deposits, lending in 2014 appreciated by 7.6%, where total credit extended to the private sector had exceeded $52 billion in December 2014. The system’s customer loans/deposits ration as of 2015 is 34.3%, down from 34.5% in 2014. The loan dollarization ratio remained on a downward trajectory at end-2014, printing at 75.6%, and marking a new historic low.

KEEP THEM KEEN

External and internal turmoil led the BDL to introduce a $1.4 billion stimulus package in 2013 and $800 million in 2014. These featured low interest loans to bolster the flagging housing sector and more favorable loans for SMEs, in pursuit of a slender 2% estimated growth rate for 2015. The first two facilities contributed roughly 50% of real GDP growth. Other productive sectors earmarked to benefit from bank loans made possible by a third—$1 billion—stimulus package in 2015 feature renewable energy schemes, and R&D startups. Notably, the BDL has been able thus far inject additional liquidity to the system, while keeping inflation in check; it stood at a tolerable 4% in 2014.

A DISCIPLINED LANDSCAPE

Lebanese banking stability clearly benefits, too, from the strict attention to international standards, importantly concerning accounting and transparent standards of disclosure as well as disciplined solvency. The ratio of total capital/risk weighted assets stood at roughly 12.2% at end-2013, strongly above the Basel III stipulated minimum 10.5%. Indeed, the BDL is tasking banks with boosting their capitalization through imposing minimum capital ratios exceeding those imposed by Basel III. The target is 8% by end-2015 for common shares, 10.5% for Tier I capital, and 12% for total capital.

The system’s liquidity is maintained by the BDL requirement for banks to hold 25% of their demand liabilities in LBP and 15% of their term liabilities in LBP as required reserves on Lebanese pound accounts. Banks are also obliged to keep of 10% of their FX liabilities as net liquid assets, and a minimum of 15% of those liabilities as remunerated foreign currency deposits. These are remunerated on maturity by taking into account prevailing market interest rates.

To shore up any perceived operational shortfalls, the BDl commenced a modernization program in March 2014. Part of this featured the launch of two new organs. The first, the Financial Stability Unit, scrutinizes the financial sector for susceptibility to crisis, this marked a practical response to prevailing factors of instability. And the second, the Consumer Protection Unit, enforces transparency in banking operations to foster greater customer confidence in the system.

EUROBONDS

BLOM Bank, Citigroup, and Societe Generale de Banque au Liban have been mandated to lead manage Lebanon’s return to the international bond market since its two offerings of April 2014. The Eurobond, foreseen raising a minimum of $1 billionn. Lebanon reportedly has two bonds maturing in June and August, with each worth $500 million.

FURTHER AFIELD

Lebanon’s banks have long been seen as a safe address, and associated with international openness. Today’s system boasts 14 branches of Arab and foreign commercial banks. Meanwhile, 11 foreign banks operate in Lebanon, holding major stakes in well-established Lebanese players. Furthermore, banks operating in Lebanon deal with around 230 correspondent banks across 88 cities worldwide to facilitate the international financial dealings. Lebanese banks comprising roughly 90% of the sector cover core Arab markets including Syria, Jordan, Iraq, Egypt, Sudan, Algeria, Saudi Arabia, the UAE, Bahrain, Qatar, and Oman. Lebanon’s Bank Audi, for example, seeks to double its assets and earnings in Egypt by 2017. That market was its most profitable overseas operation in 1Q2015 on earnings of $22 million, marking a 52% YoY gain. Key regional markets such as Turkey, too, have not been ignored. In October 2012 Odeabank (1Q2015 net earning $11 million), the subsidiary of Lebanese institution Bank Audi (1Q2015 net earnings of $100 million +16.7% YoY), became the first bank in 15 years to receive a banking license from the Turkey’s Banking Regulation and Supervision Agency (BRSA). Odeabank thus became the 49th entity in the Turkish banking sector, and had ranked among the top 10 banks in the local sector within 29 months of opening its doors

SELECTED NAMES AND METRICS

Established in 1944, a giant of the sector, Bankmed’s profitability has been on a steady incline over the past five years. For 2014 net profits posted a record $133.5 million, as total consolidated assets climbed 12% YoY to $15.4 billion fueled by muscled-up investment and loan portfolios. Loans rose 6% to $4.7 billion, while customer deposits saw a double-digit performance, up 10% to $12.1 billion. The loan/deposit ratio printed at 39.1% and the robust provisions coverage ratio surpassed 150%, while the liquidity ratio was at 35.45%, and capital adequacy ratio at 14.3. Byblos Bank’s saw a net profit rise of 6.7% YoY to $32.76 million for 1Q2015 on the strength of a 12.8% rise in net interest income to $63 million, slightly offset by the 13.1% YoY decline in net fees and commission income to $20.7 million. Total assets shed 0.4% YtD to $19 billion by end-March 2015. Meanwhile, loans and advances to customers lost 0.8% to $4.7 billion, as customer deposits lost 0.3% for 1Q2015 to $15.5 billion. Bank of Beirut (BoB) closed 1Q2015 on a net profit of $40.6 million leaping 10.23% YoY, essentially thanks to the 16.5% YoY climb in net interest income to $57.7 million. Yet net fees and commission income had shed 6.9% to $17.6 million for the period. Total assets for the period rose 8.2% YoY to $14.5 billion on the back of loan portfolio growth of 10.9% to $4 billion. and parallel rise of 13% in financial assets to $5.36 billion. In parallel, total liabilities of $12.6 billion for 1Q2015 2015 had climbed YoY from $11.8 billion with customer deposits up 6.8% YoY to $10.7 billion. BEMO Bank saw a 1Q2015 net profit of $3.14 million, improved YoY from $2.7 million fueled by a solid 18.1% rise in net fees and commission income to $1.1 million. Net interest income rose 3% to $6 million for the period. Total assets were virtually flat in YoY 1Q2015 at $1.5 billion. On the liability front, quarterly deposits rose to $1.2 billion by March 2015, but were down 0.9% YoY.

Islamic institution BLOM Development Bank (BLOM) is proud to have been Lebanon’s pioneer of sharia-compliant short- and long-term placements with BDL. In conversation with TBY, Saad Azhari, Chairman and General Manager of BLOM Development Bank BLOM observed that, “Islamic banking remains a niche market in Lebanon mainly due to the predominance of conventional banking and the cultural and religious diversity of the country.” Notwithstanding it has seen an encouraging trend; “…experiencing double-digit growth rates over the past few years.” For 1Q2015 the bank’s net profit reached $91.2 million, up 4.2% YoY raised by higher profits generated by BLOM’s foreign subsidiaries. This reflects in profitability ratios where ROAE and ROAA were respectively at 14.4% and 1.3%. Operational prudency, too, is confirmed by the lowest cost/income ratio among listed banks of 39.1%.

The consensus seems to be that the banks can weather prevailing woes that remain beyond their control. As Dr. Salim G. Sfeir, the Chairman of the Board and General Manager of Bank of Beirut told TBY, “Regretfully, 2015 will be much different from previous years. The regional environment is politically more difficult, and our markets have shrunk due to the prevailing political situation in the country.” And regarding the short-term outlook the final word goes to Dr. Makram Sader, who does not “…foresee any dramatic changes occurring in the Lebanese banking industry in 2015.” Rather, he asserts, “We are fighting to sustain our industry’s development at a good growth rate—aiming at 6-7%—and if we are able to attain this (6.6% 2014) it would be sufficient to finance our economy and the public sector in both foreign and Lebanese currencies.”

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