Lebanese banks battle against adversity

12 June 2013

A state stimulus package and diversification into international markets are helping Lebanon’s banks tackle tough conditions resulting from the knock-on effect of Syria’s civil war

With a politically turbulent region and few opportunities to lend other than taking on domestic sovereign risk, Lebanese banks have become highly exposed to state debt. Beirut’s already sizeable debt burden rose to $58bn at the end of January and is expected to increase further as the country experiences muted economic growth and renewed political crises. Any hopes for reform that could have been achieved following the scheduled June election were dashed in May, when parliament announced it was extending its term until November next year.

Despite the challenging conditions, Lebanon’s largest banks managed to post modest profits increases over the past year. In 2012, Bank Audi’s profit rose 5 per cent to $384m, while that of Blom Bank climbed 1.2 per cent to $335m. Byblos Bank’s net income, on the other hand, dropped 6.6 per cent to $169m after allocating $66.7m in provisions for credit losses.

The first quarter of 2013 continued on a similar note of mixed success, with the combined profits of the three banks reaching $208.4m – a quarter-on-quarter decline of 4.1 per cent.

Profit growth

Notwithstanding the lack of lending opportunities, analysts point to some solid fundamentals in the Lebanese banking sector.

“Lebanese banks are … in a sound position to gradually absorb deterioration in loan quality”

Paul-Henri Pruvost, Standard & Poor’s

“Growth in deposits from the Lebanese diaspora remains strong. We have seen a dip due to the unrest in Syria, but any drops in deposits as the result of political change tend to be short-lived,” says Paul-Henri Pruvost, a Dubai-based associate at the US’ Standard & Poor’s (S&P), a credit ratings agency. “Lebanese banks are also in a sound position to gradually absorb deterioration in loan quality, which could continue to emerge in coming quarters.”

The lenders’ non-performing loans (NPLs) ratio was 2.8 per cent last year, compared with an average of 5.5 per cent in the Middle East and North Africa region. General provisions amounted to $400m-450m.

Against a backdrop of a slow domestic economy, profit growth at Lebanon’s banks is expected to remain moderate in the year ahead. The World Bank says Lebanon’s real gross domestic product (GDP) grew by 1.7 percent last year – the result of nominal growth of 8 per cent and inflation at 6 per cent – lower than the 3 per cent seen in 2011. This reflected the destabilising impact of the Syrian civil war on neighbouring economies.

Lebanon is expected to run larger deficits of 15-20 per cent of GDP over the next couple of years, according to S&P. Its debt to GDP ratio was 126.2 per cent in 2012.

Central bank governor Riad Salameh in December predicted that real GDP growth would reach 2 per cent this year.

“We don’t see large credit growth in terms of lending; single-digit growth would be positive,” says Pruvost. Another US ratings agency Moody’s Investors Service expects credit growth in Lebanon to be 8-10 per cent in 2013.

Aware that the economy needs a kick-start to spur further growth, the Central Bank of Lebanon is introducing a stimulus package this year.

The central bank has announced it will give £Leb2.2 trillion ($1.46bn) in credit facilities to commercial banks at a 1 per cent interest rate. This should balance out banks’ reserves, compensating for a reduction in mortgage lending, brought about by the turmoil in the wider region that has knocked confidence in Lebanon’s property sector.

Sector liquidity

The details are outlined in the central bank’s circular 313, which states that commercial banks can use the stimulus package to provide subsidised loans focused on the real estate sector and to support projects, such as renewable energy.

Whether that will be enough to combat a decline in the real estate sector remains to be seen, says the US’ Citigroup, which notes in an analyst report that monetary policy has its limits when it comes to stimulating credit growth. However, it also adds that while private sector loan growth has decelerated in recent months, it remains in double digits, which is “relatively healthy” by regional standards.

“Combined with continued deposit growth, Citi sees the banking sector as highly liquid,” says the report.

Customer deposits represented about 2.7 times system loans at the end of October, and are largely channeled towards Lebanese government debt, which dominates both the domestic capital market and banks’ balance sheets. During that same month, the central bank reported a cushion of foreign currencies worth $29.5bn.

The forecast for Lebanon’s GDP growth this year is slightly below the 3.4 per cent Mena although it is expected to rise gradually to about 4 per cent by 2015, according to the World Bank. “Growth rates in Lebanon have significantly decreased, which [affects] asset quality, although there is still growth in the economy,” says Freddie Baz, chief financial officer and strategy director at Bank Audi, the country’s biggest bank.

Operational cutbacks

Prior to 2011, Lebanon’s banks had been expanding across the region, but those plans have been frozen as the unrest has played out. Some banks have even shrunk their operations in Egypt, Jordan and Syria, adopting a wait-and-see approach, while dealing with a modest rise in NPLs from those countries.

“We’ve reduced our exposure to Syria, but our network is intact,” says Baz. “Currently, five out of 22 branches are operational in Syria. We’ve had a reduction in staff count because a lot of people left the country, which we’ve replaced in the best way available. The group never decided on massive layoffs or closure. Most importantly, we wanted to deleverage to avoid short-term shock.”

As for Egypt, Baz says its political transition is normal. “We’re not really concerned about growth there, but we have to protect ourselves in the short term,” he says. “Our business plan is quite ambitious and we still consider Egypt as a main development pillar for the group.”

With fewer opportunities for growth in neighbouring countries, analysts say Lebanese banks have cast their eye further afield into new territories. “The focus for the largest Lebanese banks is now shifting from the Levant region and Egypt to the north, to countries such as Turkey and northern Iraq,” says Pruvost.

“Two Lebanese banks have managed to grow sizeable operations in Turkey to cater to their existing customers with business there – one is BankMed through a joint venture with the local Turkland Bank and the other is Bank Audi, which obtained its licence last year.”

Baz says Bank Audi experienced delays to its business plan for the region as a result of political instability, but its operations in Turkey have helped to mitigate the impact.

“[Lebanese] banks are even expanding into territories overseas, such as Bank of Beirut targeting Australia”

Wassim Shahin, Lebanese American University

“Turkey, which was part of our expansion plans before the Arab spring, is bringing a lot of added value to the group,” he says. “We’ve seen a huge increase in assets, deposits and loans. If you consider that trade flows between Turkey and the Arab world amounted to $50bn last year, it’s clear the potential for a group like ours is enormous. Turkey is going to more than compensate for the delay we’ve seen in several countries in the Near East because of the Arab Spring.” That may change after protests have rocked Turkey in recent weeks.

Pruvost says he expects this to be part of a growing trend in the region. “It is difficult to say if profits in new markets will make up for the losses from the Arab uprising region, but they will have a sizeable impact. I wouldn’t be surprised if Lebanese banks would increasingly choose new markets – not only Lebanese banks, but also other players in the region.”

Expatriate remittances

Lebanese banks are also targeting expatriate business abroad. “The sources of deposit growth have historically been, to a large extent, remittances of Lebanese non-residents to their homeland,” says Wassim Shahin, dean of the School of Business at the Lebanese American University in Byblos. “In order to grow their business, banks are even expanding into territories overseas, such as Bank of Beirut targeting Australia.”

In 2012, remittances to Lebanon totalled $7.4bn, with expatriates in Europe, North America and the Asia-Pacific region accounting for the bulk of funds sent home.

In 2011, Bank of Beirut acquired 85 per cent of Australia’s Laiki Bank and this month announced it would be rebranding its subsidiary Beirut Hellenic Bank, relaunching it under a new name, Bank of Sydney.

Lebanese customers living abroad and the potential for further loan growth will likely continue to generate a strong inflow of deposits, although much of that is likely to be exposed to sovereign risk.

In the meantime, Lebanese banks have no other choice but to ride out the political unrest in the region, hoping the domestic market will recover, while targeting expansion elsewhere.

Key fact

The central bank is to give $1.46bn in credit facilities to commercial banks at a 1 per cent interest rate

Source: MEED

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