Lebanon's banks weathering the storm

Beirut’s banks continue to be a rare point of strength for the country, although there have been some signs at the start of this year that the market may be getting tougher. Published in MEED, 8 June 2015

If there is one bright spot on the economic and political scene in Lebanon these days, it is the banking sector. The economy experienced growth of just 2 per cent last year and it is not expected to do much better this year, undermined as it is by ongoing domestic and international political problems.

In Beirut, the list of issues the country’s politicians cannot agree over includes the appointment of a new president, a new election law, the terms of oil and gas exploration licences, and a budget. Meanwhile, the Syrian civil war continues to probe Lebanon’s borders, spooking potential investors and tourists alike.

Despite all this, Lebanese banks managed to deliver a strong performance last year. The three largest lenders – Bank Audi, Blom Bank and Byblos Bank – posted a combined net profit of £Leb1.3 trillion ($888m) in 2014, a rise of 9.5 per cent compared with the previous year. Their combined assets rose by a similar amount, and customer loans and deposits were up by 12 per cent and 10 per cent respectively.

Resilient economy

Even the country’s politicians agree the banking system is one of the few things that still work well in Lebanon. “We have a resilient economy,” said Alain Hakim, minister of economy and trade, at an event in Brussels in February.

“We managed in 2014 to have about 2 per cent growth … and that is due to three big factors. The first one is the private sector, the second is the financial sector and the third is the immigrants and expatriates, who are helping a lot by capital influx.”

Much of the credit for the strength of the banking system goes to the central bank, Banque du Liban. Its long-serving governor, Riad Salame, has ensured the sector is well regulated. The industry has also been bolstered by a reliable monetary policy as a result of the Lebanese pound’s solid peg to the US dollar. Just as important, however, is the role of the country’s diaspora, who continue to channel a large chunk of their earnings back to banks in their home country. Lebanon is the second-largest recipient of remittances in the Middle East, according to figures from the Washington-based World Bank, receiving $8.9bn last year.

“The cornerstone of the stability of the economy and the financial system is the ability of the banking sector to attract enough deposits to finance private sector needs and the borrowing needs of the government,” says Nassib Ghobril, chief economist at Byblos Bank.

The most profitable of the big banks last year was Blom Bank, which posted a net income of £Leb550bn, a 3.7 per cent rise on 2013. Blom Bank puts its high level of profitability down to its ability to run a more efficient operation than the other two big banks.

In a research note issued in February, its investment banking subsidiary Blominvest Bank pointed out that Blom Bank recorded the highest return-on-average equity (ROAE) last year, at 15.8 per cent, and the highest return-on-average assets (ROAA), at 1.4 per cent. In comparison, Bank Audi’s ROAE was 13.6 per cent and its ROAA was 0.9 per cent, while the respective figures for Byblos Bank were 11.4 per cent and 0.9 per cent.

Even so, the profits at these other two banks rose at a faster rate last year. At Bank Audi, profit was up by 15 per cent to £Leb528bn while Byblos Bank posted a 12.3 per cent gain to £Leb265bn. Some of the smaller banks are seeing even more rapid growth in profits.

Bank of Beirut and Lebanon & Gulf Bank both saw their profit rise by about 20 per cent, to £Leb265bn and £Leb41bn respectively, while the far smaller Banque Bemo posted a 75 per cent increase in net profit last year to £Leb16.8bn.

These days, an ever increasing proportion of the sector’s profits come from the banks’ international subsidiaries. Lebanon’s lenders have been enthusiastically expanding overseas for many decades, opening up subsidiaries and branches in countries around the Middle East, Europe and Africa, with Latin America a likely target for future expansion. Blom Bank and Bank Audi now both operate in 12 overseas markets and Byblos Bank is just behind them with a presence in 11 countries. Among the smaller institutions Bank of Beirut is in 10 other countries, Fransabank operates in nine countries and Credit Libanais is in five markets.

International reach

This international reach provides the banks with much-needed diversification from Lebanon’s economy. Bank Audi has been leading the way in this regard, particularly since its expansion into the Turkish market, where its subsidiary Odeabank began operating in November 2012.

Overall, some 47 per cent of Bank Audi’s assets, along with 45 per cent of customer deposits and 66 per cent of its loans, now come from beyond Lebanon’s borders. The same approach is evident at the other main banks, if not to quite the same extent. The international operations of Blom Bank, for example, contributed about 22 per cent of its total assets at the end of last year, along with 27 per cent of its profits, 20 per cent of customer deposits and 26 per cent of loans.

The scale of its international operations has helped Bank Audi to extend its lead as the largest Lebanese bank in terms of assets. Overall, the group’s assets grew by 15.9 per cent last year, reaching £Leb42 trillion by the end of December, while its loan portfolio increased by 16.5 per cent to £Leb25.8 trillion. In comparison, Blom Bank reported £Leb42 trillion in assets at the end of 2014, up 7 per cent over the year, while its loan portfolio grew by 8.9 per cent to reach £Leb10.4 trillion. Assets at Byblos Bank reached £Leb28.7 trillion, a rise of 3 per cent, and its loan portfolio was up 4.9 per cent to £Leb7.1 trillion.

Such figures point to a financial services sector that is in good health. The US’ Fitch Ratings sums up the country’s banking sector as being “large, liquid and well-regulated”.

The Lebanese people also appear to be taking the ongoing uncertainty in the domestic and regional political climate in their stride, which helps to underpin the health of the banking sector. Take for instance the consumer confidence index run by Byblos Bank and the American University of Beirut, which reached 45.5 points in November, its highest level since July 2012. While it did fall back again in December, the average level of the index last year was still the highest it had been since 2011.

Other financial metrics offer further reasons to think the market remains stable. Garbis Iradian, chief economist at the Washington-based International Institute of Finance, points out that the dollarisation rate of bank deposits has remained stable at about 66 per cent over the past three years. He also notes that credit growth to the resident private sector remained fairly rapid at 9.3 per cent last year, boosted by a series of stimulus packages from the central bank over the past few years.

However, there have been some signs in the opening months of this year that the market may be getting tougher for at least some of the banks. The total value of assets held by the big three declined slightly in the opening quarter of the year, from £Leb134.1 trillion at the end of 2014 to £Leb133.4 trillion by the end of March 2015. Customer loans and deposits at the three institutions were also down, by 2.6 per cent and 0.9 per cent respectively. On the other hand, their profits were up by almost 9 per cent to £Leb331bn for the three-month period. For the banking sector as a whole, deposits grew by just 0.7 per cent in the first quarter of the year.

Need for stability

In Lebanon, there is always the risk things could take a turn for the worse, as the US-based IMF noted in mid-May in a statement following the conclusion of its annual mission to the country. “Lebanon’s economic model rests on confidence,” the fund noted.

“The underlying faith of foreign investors and the large Lebanese diaspora is the basis for the country’s continued ability to attract sizeable deposit inflows. Historically, these inflows have been resilient … However, the growth rate of deposits is slowing. A decisive change in policies is thus needed to strengthen confidence, which cannot be taken for granted in the current international environment.”