TBY talks to Freddie C. Baz, Group CFO & Strategy Director of Bank Audi, on sector resilience, deposit growth, and regional expansion plans.
TBY Lebanese banks are famously resilient, providing a vital anchor of stability for the national economy and the entire region. Can you tell us about the prudential measures and other factors that have created this resilience?
FREDDIE C. BAZ Most importantly, banks are not allowed to hold any structured products or derivative products on their balance sheets. This was implemented by the central bank, the Banque du Liban, in 2004 before concerns related to the global financial crisis began to emerge. At that time a number of other stringent measures were created, including equity acquisitions that cannot be financed for more than 50% of the value of the investment. We cannot finance real estate development projects for more than 60% of the value of a project, which means leverage is very low and real estate bubbles cannot easily happen in Lebanon. Also, we are not allowed to hold any foreign currency position in excess of 1% of our equity. We have those types of regulations, which represent very important buffers in difficult times. Still, our resiliency is not only related to strict supervision; it also relates to risk aversion at the bank management level. Lebanese banks passed through difficult times in the 1970s and 1980s, which were very difficult years in terms of political turbulence and war. This taught Lebanese bankers high-level risk management. Our ability to manage uncertainties is our main competitive advantage. We are boring banks. By that I mean our business is very easy. We gather customer deposits, which we then use in short-term financing, maintaining at all times high liquidity levels. We don’t perform complex transactions. We are deposit-rich banks. Our customer deposits represent almost 82% of our funding.
In keeping with this trend, there has already been a 3% increase in deposits in 1H2011 across the board so far. What specifically is driving this growth?
I believe those numbers are typical for our country. The discrepancy between the residents and the diaspora makes Lebanon unique. There are 12 million Lebanese spread over five continents, but only 4 million in Lebanon. This diaspora is a successful group that has generated a lot of wealth, and the new waves of immigrants in particular keep sending money back home. Lebanon has the highest remittance per capita worldwide at around $2,000. To put that in context, the total per capita income of non-oil producing countries in the region is around $3,400. In Lebanon itself it is $10,800. Around 40% of inflows are remittances, around 30% is FDI, and the remaining are unilateral transfers. In 1H2011 we witnessed inflows in the range of $6.6 billion, which translated into additional deposits worth $4.3 billion. That’s less inflows than in 2010, but the same level of deposit growth.
For Bank Audi specifically, your depositor base is about 70% from inside Lebanon and 30% outside. You have a goal to make that ratio 50-50. How will you achieve this?
This is one of our most important targets for our regional expansion. When you get to become bigger than your domestic economy, the only way to keep generating economies of scale and efficiency gains is to expand beyond your national boundaries. Our strategy today is two fold. The first is to consolidate and strengthen our domestic leadership as we are the number one bank in Lebanon by far. When you have such a dominant position in your domestic market you have to do everything necessary to further strengthen this position, and we have a team that is focusing exclusively on the domestic franchise. The second aspect is our regional expansion. In mid-2005 our domestic assets represented 98% of our total assets with only two small European subsidiaries. Our domestic assets represented close to 55% of Lebanon’s GDP, and this was the trigger. In 2006 we began expanding in the Middle East. There were many case studies that led us to the decision to become a regional bank. Between 2000 and 2006 Arab wealth as measured by consolidated GDP almost tripled from $700 billion to more than $1.9 trillion, triggering a similar growth in bank assets, with the assets-to-GDP ratio still being 1:1. Large individual banks tripled in size, but this never translated to the emergence of real regional players as they still focused on their domestic markets. This is not surprising because there is so much to do in the domestic markets, so why should they bother to go elsewhere? However, the region requires regional intermediation. Yearly inter-Arab trade turnover represents not less than $76 billion. It’s not that the business is not covered today, but it is fragmented and partitioned. There is room for regional players to build captive market shares, and that is the motive of our strategy. In terms of individual banking, the region has millions of Arab expatriates from the Levant and North Africa, mostly working in the GCC. We believe we can build a captive market share by providing accounts and products in their home countries and host countries.
What is your outlook for the Lebanese economy over the medium term?
The “steady state” level of GDP for Lebanon, which is calculated under the hypothetical that there was no war in the 1970s and 1980s, is $89 billion. This is calculated by looking at the average growth for the preceding 20 years to the outbreak of the 1970s events. This $89 billion corresponds exactly to the ambition of the Lebanese for their standards of living and welfare. There have been huge rehabilitation investments, first undertaken by the government of the late Rafic Hariri in 1992 in rebuilding basic infrastructure, followed by several investments from the private sector to replenish capital assets. More than $50 billion of public and private investments have been made to restore the output capacity of the country. We have witnessed very important growth rates over the last three years because of our resilience, granting the Lebanese considerable competitive advantages during the turmoil. Despite those 8%-9% yearly growth rates in GDP, Lebanon is still facing an output gap of 25%, which means that the actual output of $42 billion could easily be $56 billion. Lebanon can sustain high GDP growth rates in the foreseeable future.
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