In the Shadow of the Banks

Oct. 24, 2018

Lebanon has shed its opacity with internationally recognized efforts to establish a stable and competitive financial universe.

The banking sector of B- rated Lebanon, dominating the financial universe, had long reaped the benefits of a no-questions-asked approach to financial intermediation. Yet regulation has been neglected, and the authorities' oversight is a boon to investor confidence. Alain A. Bifani, Director General at the Ministry of Finance, told TBY that in securing adequate liquidity, “we secure the required buffers in the banking system, making the nation more attractive." And as we will see, the largest banks have proven resilient to even the slightest political tremors.

Judging the Mood(y's)

In March, Moody's labeled Lebanon 'credit positive' for its implementation of Liquidity Coverage Ratio (LCR), a Basel III requirement stipulating that banks, with the exception of Islamic institutions, hold high-quality liquid assets (HQLAs) capable of covering 100% of stressed net cash requirements over a 30-day period. Riad T. Salamé is the Governor of the Central Bank (BDL), which saw total asset growth of 1.57% to USD122 billion in mid-February, up MoM from USD120.86 billion. He confirmed that where capital-adequacy ratios were concerned, “Lebanese banks exceed the required ratios as stated by Basle III." Sector CAR is currently at 15.77%.

Fostering Economic Momentum

Riad T. Salamé explained, too, how the BDL was galvanizing diverse economic sectors, notably among SMEs, which comprise over 97% of local enterprises. The BDL has extended indirect support through facilitated credit incentives for the productive sectors. BDL data indicates that total credit extended by Lebanese banks to the economic sectors had risen 4.2% YoY to USD66.92 billion by September 2017, at around 127% of estimated GDP. Notably, it has targeted equity financing towards the Lebanese knowledge economy, having, "...attracted around 800 startups and SMEs, and created 6,000 jobs to date. This promising sector will account soon for more than 2% of GDP." On a side note, the BDL envisages introducing its own supervised digital currency within a few years once safety measures are in place.

Running with the Alphas

Lebanon's 14 so-called Alpha banks are those with deposits north of USD2 billion, and which together sit on 87% of total system assets of USD227 billion as at end-September 2017. Sector research for 2017 puts their collective profits of USD2.4 billion at roughly fourfold the size of the overall economy.

Some Numbers

Data for 2017 puts total assets up 6.6% YoY to USD232.98 billion in 2017, with domestic assets accounting for 84.25%, up 8% YoY, while foreign assets were flat YoY. Exposure to regional tension in overseas areas of operation dented foreign lending (-9.2% YoY). Total loans to customers rose 1.7% to USD66.51 billion, with domestic loans up 6.1% to USD49.17 billion. The Alpha Group's sustained net profit rise was at 6% YoY to USD2.4 billion, although operating profit shed 14% to USD2.76 billion. This is chiefly explained by the pronounced decline in net gains on financial investments having seen exceptional gains in 2016 due to the BDL's program of low interest rate loans. Its loans-to-deposits ratio modestly slipped from 37.07% in 2016 to 36.42% in 2017.

Gauging asset quality, its ratio of gross doubtful loans to total gross loans was almost flat at 5.63% for 2017. Customer deposits appreciated again in 2017 (3.5%), but shy of the 2016 rise of 3.99% YoY. The resignation of the prime minister in November prompted notable, but manageable capital outflows and reflecting in a 4% annual fall in LBP-denominated customer deposits to USD51.02 billion in 2017. On the flip side, customer deposits in FX saw a double-digit annual rise of 10% to USD105.79 billion in 2017.

The Fantastic 4

The big-four Lebanese banks, namely BLOM, Audi, Byblos, and Bank of Beirut remained in rude health in 2017. Despite remarkable volatility in the political arena, their aggregate operational net profit rose 1.8% YoY to USD1,323.06 million. BLOM Bank led the pack with USD484.69 in net profit, up 4.72% YoY. It was followed by Bank Audi with USD463.83 million (-1.33% YoY), Bank of Beirut with USD204.42 (+1.51% YoY), and Byblos Bank with USD170.12 (2.9% YoY). By assets Audi printed USD43.75 billion (-1.16% YoY), while BLOM posted USD32.54 billion (+10.25% YoY). The bank's balance sheet positively reflected its acquisition and merger in June 2017 of the assets and liabilities of HSBC Lebanon's three London branches. Meanwhile, Byblos sat on assets of USD22.66 billion (+9.12%), and Bank of Beirut on USD18.37 billion (+6.78%).

Credit Where Due

The banking sector remains a key source of financing for the government through treasury bill purchases. That said, 2017 saw a marked decline in the exposure of the Alphas to sovereign debt. Their subscription to LBP-denominated BDL certificates of deposits tanked 19.49% to USD10.51 billion. Likewise, subscription to Treasury bills in LBP and Lebanese eurobonds also shed an annual 10.89% and 9.47% to USD15.36 billion and USD13.16 billion for last year, respectively. The sector will also participate in the USD11 billion reconstruction credit package granted to Lebanon at April's CEDRE Conference in Paris.

By category breakdown, individual loans dominated the field on 31.8% of the total followed by contracting and construction loans (17.1%) and wholesale trade loans (14.7%). General unease curbed property purchases in 2017, whereby the value of loans extended to contracting and construction shed 1.2% year-to-September 2017 to USD11.42 billion. Among individual loans, BDL Circular #473 of October 2017 conditionally raised the ceiling on subsidized housing loans from LBP800 million to LBP1.2 billion.

Cover Story

Latest available Association of Insurance Companies in Lebanon (ACAL) figures reveal that Lebanon's insurance sector of roughly 50 players grew 4% YoY in 2017, accounting for 5% of the overall Arab market. Penetration stands at roughly 3.08%. For the year the industry printed GWP of USD1.63 billion on a YoY climb of 3.8% from USD1.57 billion in 2016. By branch we note the following YoY rises: cargo insurance up 16% to USD37 million, life up 5% to USD504.9 million, medical and motor both up 4% to USD478.06 million and USD376.57 million, respectively, while fire and worker compensation both rose just 1% to a respective USD109.31 million and USD52.6 million. And while the life branch rose to 30.9% of total premiums in 2017, from 30.8% in 2016, non-life fractionally slipped to 69.1% in 2017 from 69.2% in 2016.

Capital Markets

The Beirut Stock Exchange (BSE), dating back to 1920, is the region's second-oldest bourse. Its modern incarnation moved with the times when in August 2011 parliament endorsed the Financial Markets Law that established its regulator, the Capital Market Authority. Aside from creating conducive conditions for the trading of financial instruments, the law also enabled the BSE's restructuring for ultimate privatization. Indeed, in September 2017 the Council of Ministers laid the groundwork of the Beirut Stock Exchange (BSE) SAL, a joint stock company to replace the BSE.


In 2017, a year where sentiment across the financial industry recoiled from political confusion, 28 listed stocks traded at the BSE. Yet while the benchmark BLOM Stock Index (BSI) shed 5.36% YoY to 1,147.75 points, MCap climbed from USD10.2 billion as at end-2016 to USD11.32 billion. More recently, as of April 20, the benchmark BLOM Stock Index (BSI) lost 0.03% to 1,138 from 1,138 in the previous trading session. Historically, the benchmark had seen a historic high of 1,500.8 in January 2011 and troughed at 1089.81 in November 2017. As of that date the 52-week range was 1,085.82 - 1,248.64, the one-year return 6.28%, while Ytd the index had declined 0.96%. Until March 2018, 34,632,170 shares valued at USD248.8 million were traded in total, while overall listed capitalization stood at USD11.9 billion.

Overall, we note a financial sector essentially resilient to political ructions, one that is well regulated and primed to exploit better days.