LEBANON'S larger banks had a good year in 1995, with most of the top half-dozen institutions reporting higher profits and healthy balance sheet growth. Two of the biggest - Banque de Ia Mediterranee and Byblos Bank - reported that their net profits more than doubled in the year. 1995 also saw the first of what promises to be a stream of international debt and equity issues as the banks build up their capital and assemble the funds for longer-term lending at home.

Banque de la Mediterranee has vaulted over Banque du Liban & d'Outre-Mer to become Lebanon's largest commercial bank with just under $2,000 million in assets.

The bank, which set up a merchant banking subsidiary at the start of 1996, is owned by an investment vehicle based in Luxembourg in which Prime Minister Rafiq Hariri is understood to own a controlling stake.

The strong showing of the largest Lebanese banks comes despite the periodic upset of Israeli bombardments of the south, which some foreign bankers take as evidence that the domestic economy has become robustly resistant to the political crises that still afflict Lebanon.

However, there are more than 80 commercial banks in the country: most of them are very small and in the longer term some may be overwhelmed by the pressure of competition within the small Lebanese domestic market.

A scattering of interim results from this year indicate that 1996 might hold more good news for the bigger banks despite general uncertainty about the fate of the peace process between Israel and its Arab neighbours, including Lebanon. Byblos Bank has reported net income equivalent to $10.7 million for the first half of this year, more than double the bank's profits in the same period of the previous year. By comparison, the bank's profits for 1995 were around $17 million. Banque Audi, made known to the world late last year through a $34 million global equity offering, has also reported a sharp rise in first-half profits.

The bigger banks are starting to hunt around for new sources of medium-term funds to diversify away from their reliance on short-term customer deposits, and some are looking with new confidence at the possibilities of the international debt mar- kets. Competition for hard currency deposits at home is intense, as is reflected by an agreement signed by 12 major banks in October 1995 to exercise restraint in raising interest rates for depositors.

The governmnent and the central bank are actively encouraging the development of the commercial banking sector to help with the ongoing reconstruction of Lebanon after the civil war which ended in 1990.

The central bank estimates that the reconstruction will require a total of around $55,000 million-$60,000 million over a 10year period, much of which will have to come from abroad.

New laws and directives have been introduced or are in the pipeline - increased capital requirements, laws on leasing and investment management and a fiduciary contracts law intended to allow banks more scope for off-balance sheet financing and Islamic banking business. One Islamic banking project, sponsored by the Islamic Development Bank and a foreign Islamic commercial bank, Kuwait Finance House.

has been awaiting changes to the law to allow it to go ahead. Nevertheless, bankers observe that it takes a long time to steer new regulations around the various interest groups in Lebanon's political scene.

In May 1996, parliament approved a law allowing the banks, which are mostly privately controlled by business families, to trade up to 30 per cent of their shares on the stock exchange. The central bank has also allowed banks that lend in the longer term to productive projects to reduce their statutory reserves by the amount they lend.

For the overseas investor in Lebanon the trend of greatest interest in the banking sector has been the growing stream of short and medium-term debt and equity issues from some of the larger banks. There seems to be no lack of appetite among foreign investors for exposure to Lebanon despite the political uncertainties that cast shadows over the country and its neighhours. Here are the highlights:

-Byblos Bank launched a $50 million threeyear Euronote on 9 September, to be listed on the Luxembourg stock exchange. SBC Warburg and local finance house Lebanon Invest arranged the issue, which was priced at 285 basis points over comparable US treasuries and sold out in 30 minutes.

The bank previocisly raised $11.6 million in equity in June 1995 through an international equity placement managed by Nomura and Lebanon invest, alongside a rights issue which raised a similar amount.

-Banque de Ia Mediterranee announced in September that it is setting up a continuous programme to issue certificates of deposit in the intetnational markets. The total amount of certificates issued will be $150 million, with a first $50 million tranche of two-year paper due out in late September.

The first issue is intended to set a benchmark so that the bank can sell further tranches with maturities of one to five years. The programme is being lead-managed by Merrill Lynch International and the Lebanese bank's own investment arm, Mediterranee Investment Bank.

-Credit Libanais launched a $60 million, three-year Eurobond in June, priced at 320 basis points over three-year US treasuries, equivalent to a coupon of 9 per cent. Mer rill Lynch was also the lead manager for that issue.

-Banque Audi raised its capital through a $34 million global depositary receipt (GDR) issue in October 1995, which was leadmanaged by Flemings.

There are likely to be further debt and equity issues as more banks seek to position themselves for a local market that has been waking up after years of war-induced inertia. Banque Audi is now reported to be planning a Eurobond issue. - Banque du Liban (central bank) governor Riad Salameb has said that he expects all of Lebanon's 10 biggest banks to do so.

Foreign investment bankers say another GDR issue from a Lebanese bank, as yet unnamed, is already on the cards. The issues of the last 11 months, which also include debt offerings from the government and industrial concerns, are putting Lebanon decisively onto the map for global investors.

DO'S