Lebanese Banks Under Siege in Syria

Published in Bloomberg Businessweek, 3 October 2013

“As a bank we don’t do politics,” says one senior Lebanese financier. It’s an understandable position given the fractious history of this corner of the Middle East.

Stoicism and resilience have long been important qualities in the Lebanese business world and maintaining a neutral position is often vital if a business is to succeed. But it can be hard to maintain that position in the face of the horrors that are taking place across the border in Syria on a daily basis — a country where most Lebanese banks are active.

“What is necessary is for Syria to succeed in its political transition, to improve its political governance,” adds the financier. “Then we can start seeing economic efficiencies and banking assets grow again.”

Lebanese banks were among the earliest and most enthusiastic entrants to the Syrian banking system when Bashar al-Assad started to open up the sector soon after he came to power in 2000. Those early years of his rule were a time of optimism in Syria, with a sense that the reforms he was bringing in would be a spur to economic activity.

Fransabank and Blom Bank were the first to turn up when they opened branches in the Damascus free zone in 2001. From 2004 onwards, Lebanese banks started getting licences to set up new banks in partnership with local shareholders. Blom and Banque Bemo were the first to see their subsidiaries open that year and since then five other Lebanese banks have taken stakes in Syrian operations.

The country became a significant market for the likes of Bank Audi, Blom and Byblos Bank — the three largest Lebanese banks — but smaller institutions like First National Bank and Banque Libano-Francaise also got involved. Banks from other parts of the region also came, including several Gulf and Jordanian institutions, but not to the same extent as Lebanese bankers.

These days, however, the Lebanese banks are scaling back their operations to a bare minimum and just trying to ride out the storm. While banks around the rest of the region have been expanding rapidly, in Syria they have been mothballing branches — a recognition of the dire security situation and the fact that the value of their deposits and loans have been drying up.

“The size of our Syrian operation has shrunk very significantly. Today, it represents around 2 per cent of our consolidated balance sheet and it is likely to become even smaller. We have had to close some branches,” says Sami Haddad, general manager for international banking at Byblos Bank.

It is a similar tale at Bank Audi, where the chief finance officer, Freddie Baz, says the $300 million of assets it now has in the country represent less than 1 per cent of his group’s total assets. At the end of 2010, before the uprising against Al-Assad began, it had $2 billion in assets in the country.

Blom Bank, meanwhile, has closed almost a third of its branch network in Syria and says its loan portfolio has shrunk from $650 million a couple of years ago to about $40 million today and the value of its customers’ deposits have dropped from $1.8 billion to $400 million.

“The size of the bank has fallen sharply in the last couple of years. It is a much smaller bank, but at the same time our exposure went down sharply, because it became very small compared to our balance sheet, so the risks became smaller,” says Saad Azhari, chairman of Blom Bank.

The vagaries of wartime economics mean that Syrian banks are able to announce higher profits when reporting their results in the local currency, but when those figures are converted into US dollars they show a startling fall, even at the official exchange rate. If you use the unofficial, black market rate the picture is even worse.

Over the past 18 months, the official value of the Syrian pound has been on a steady decline from around SYP60 to the US dollar in early 2012 to more than SYP130 in late August. During that time, the black market rate fell to around SYP200, but the more belligerent tone coming out of Washington in late August saw the rate jump to SYP270, according to the Cato Institute’s Troubled Currencies Project. The implied annual inflation rate is running at around 200 per cent, which is only further diminishing the value of everyone’s holdings. “The size or our operation and balance sheet in Syria has become extremely small,” says another Lebanese banker. “Then when you add in the fact that the value of the Syrian pound has plummeted, our operations have shrunk drastically. It’s an understatement to say the picture is bleak.”

The government is sensitive to the value of the Syrian pound on the black market, regularly shutting down exchange offices and arresting their staff for “manipulating” the exchange rate. But such small measures cannot change the fundamentals of a broken, war-ravaged economy.

And for as long as the violence rages there is little hope that the position of the banks or the wider economy will improve. But despite all the obvious difficulties, what the Lebanese banks don’t seem prepared to countenance at this stage is a departure from the country. By contrast, Saudi Arabia’s Banque Saudi Fransi announced in late 2011 that it was going to pull out of Syria, although it is not clear yet whether that has happened.

“Our decision is not to exit, it is to wait and see,” says Baz. “We have been able to quickly deleverage and reduce our exposure to the country to a minimum. It is not that we haven’t been affected. Syria used to contribute $20 million to our consolidated profits whereas today it is at zero. But we want to keep our footprint intact in order to grab opportunities if and when they happen. I’m not saying Syria is necessarily going towards better times. No-one can presume how the situation will evolve, but at least it is not a costly presence anymore.”

The other Lebanese banks are adopting a similar strategy. And in the meantime, while they wait for the situation to improve, some are even managing to find crumbs of comfort from the way local customers have reacted to the storm.

“The first thing most Syrian businessmen did when the economy was going down was to close their loans, which is a positive sign,” says Azhari. “They proved to us that their reputation is very important to them. They honoured their loans when the situation was bad.

“We have scaled down our size, but we are waiting for the situation to improve so we can expand again. We are there for the long term. Now the situation is bad, but one day the conflict will end and we are definitely going to be expanding again in Syria when the situation stabilises.”