There is a limit on growth opportunities for Lebanese banks within the country’s crowded market, with 52 banks catering for a population of little more than 4 million. Having struggled with poor sovereign ratings in the past, the easing of Lebanon’s political tensions has brought about an improvement in Lebanese banks’ credit ratings, and enabled several to accelerate their plans for regional expansion.

Ratings agency Moody’s Investors Service has given the Lebanese government an outlook rating of stable, and government bonds a rating of B3. The country’s three largest banks – Bank Audi, Blom Bank and Byblos Bank – are all rated D- for financial strength and Ba2/NP for local currency deposits.

One criticism raised by ratings agencies of Lebanon’s banks is their willingness to lend to the government over the private sector. There is high yield from investments in government securities compared with the returns on private credit investment, and Lebanese banks hold 51 per cent of the government debt, or about $22bn. This is an attractive source of short-term profitability for banks, but also a structural weakness because of the government’s low sovereign rating.

Sovereign risk

Their exposure to sovereign risk is an issue, and this has been recognised by the banks, which are increasingly moving away from their traditional dependence on government securities. Reducing their exposure should help improve their credit ratings further and allow Lebanon’s largest banks to realise their international expansion plans. Such plans have been on the agenda since before the 2005 political crisis.

Nasib Ghobril, head of economic research at Byblos Bank, says the main motivation for the expansion strategies is to allow the banks to diversify their assets. “The decision to expand out of Lebanon was taken before 2005 and the recent troubles we have seen here, which simply accelerated our move.”

With lending opportunities limited in Lebanon because of the size of the market, the biggest banks have looked abroad for opportunities, keen to take a share of previously closed markets that are now opening up to competition.

Having spent years operating in an unstable political and economic environment, Lebanese banks offer a wealth of experience to the new markets in which they are operating, or plan to expand into. These plans include Iraq and Africa, where this experience will serve them well.

Byblos Bank is the first Lebanese bank to open branches in Sudan. “Sudan has its well-publicised problems, but the idea is to take advantage of the opportunities behind the headlines of instability,” says Ghobril.

“Banks do not simply go into new regions just to say they are there. They go in with the knowledge that they can compete with the local banks and the foreign banks that are present in the market.”

The bankers are aware that they may not be able to compete on all fronts with other regional players, particularly from the Gulf, where banks are much bigger in terms of geographical spread and assets. So Lebanon’s banks have tended to seek out niche markets, some delving into underdeveloped retail sectors, while others have stayed away from markets with limited competition. The approach is not uniform, with each bank basing its strategy on the differing characteristics of the markets they are expanding into.

In the Egyptian market, the focus has been on retail, while in Jordan it is on both retail and small businesses. In Sudan, where Byblos operates Byblos Bank Africa, the attention is on corporate services. In Saudi Arabia, the banks have only received investment banking licences from the Capital Market Authority.

In its attempts to enter the Egyptian market in 2005, Blom Bank had to purchase an existing bank, Misr Romanian Bank. This operation has been a huge success, the eight established branches growing to 23 and the initial outlay of $100m delivering a profit of $20m within two years.

Local acquisitions

Ultimately, the form and focus the banks take outside their own territory depends on local regulations. Where licences are restricted by a central bank authority, the banks have tended to favour acquiring local financial institutions with a well-established base.

Syria is one example. Until recently, the market had no private banks and was served by four state-owned institutions specialising in real estate, agriculture, industry and commercial lending. Syria has been largely avoided by Gulf banks, partly because its US-imposed ‘rogue nation’ status has deterred investment, leaving the Lebanese to fill the gap.

“It was known that companies did business with Lebanese banks even before the opening of the Syrian market, so it is only natural for Lebanese banks to move into Syria, as the clients are already there,” says Ghobril.

There are plenty of potential rewards for Lebanese banks investing alongside their existing corporate customers. According to Ghobril, Syria is a virgin market that can be tapped into through all types of financial products. While the Syrian market may not be huge, he says, it is ripe for growth simply because it is starting from a low base.

“There is still a large category of the population that needs to be familiarised with what banks do,” says Ghobril. “So it is a long-term investment. It has already started to pay dividends for the banks and the customers.”

Bank Audi’s operation in Syria has built close to $700m in deposits in its first year of operation, and sources say this could reach $1.5bn by the end of 2008.

In Iraq, only Byblos Bank has so far entered the market, while Bank of Beirut is on the verge of obtaining a licence to open a branch in Baghdad. “Iraq is a case that needs two things to really show its potential,” says Ghobril. “It needs security and the ability to increase its oil production and exports. Iraq used to be Lebanon’s main export destination before the troubles started.”

Byblos Bank is certain that there is potential. One of the main attractions is Iraq’s large, educated population, who are also very active in finance. Another factor is the recent improvement in security.

“The market is at a low starting point, when comparing total bank assets to gross domestic product, so there is huge potential for growth,” says Nondas Nicolaides, an analyst at Moody’s.

Byblos has the first-mover advantage and plans to expand its operations from its branch in Irbil, in the Kurdish-controlled north. The branch currently only services expatriate
customers in Iraq. “The next step is to offer products to the local market,” says Ghobril. “Byblos is not limiting itself to Lebanese clients or Syrian companies.”

“We have seen big names such as Arab Bank being invited into the market, but they have refrained from doing so because of the security situation,” says Nicolaides. “But there are banks, even foreign banks, doing limited business [in Iraq]. As the situation improves, we will see more banks entering this market.”

Avoiding risk

The majority of Lebanese banks are not simply interested in moving from one risky country to another. The strategic diversification away from lending to the government has also led to pursuing the large numbers of Lebanese expatriates, up to 15 million people, who have spread across the Gulf and Europe.

Despite Lebanon’s banks aiming for universal appeal, more often than not they are used by the increasing number of expatriate workers who have now moved to the Gulf. Further afield, there are Lebanese communities dotted through Africa that banks such as Bank of Beirut have been quick to exploit. “These are all markets that are underserved, so entry is not difficult,” says Ghobril.

But cultural and linguistic familiarities are no longer the sole requirements for expansion. Byblos Bank has an indirect presence in Armenia, while Bank of Beirut has opened a representative office in Nigeria.

Since his appointment in 2007, Saad Azhari, chairman and general manager of Blom Bank, has pursued an aggressive, two-pronged strategy of geographic expansion and service diversification. In 2007, overseas assets and profits represented 36 per cent and 24 per cent of Blom’s total assets and profits respectively. Within three to five years, Azhari expects its international assets will make up more than half the total.

The liberal regulations imposed by Lebanon’s central bank, Bank du Liban (BDL), have helped the banks’ progress. BDL allows banks to book loans domestically even when the exposure is physically outside the country.