HEART OF THE SYSTEM

Lebanon 2012 | FINANCE | REVIEW: BANKING

Lebanon's historical challenges have created an iron-clad, risk-averse banking system. Today, that system, which represents 300% of the country's GDP, is an anchor of stability for the national economy.

From the war years to the global financial crisis, Lebanese banks are famously resilient. Thanks in large part to conservative management and prudent regulation, Lebanese banks had a counter-cyclical response following the crash of Lehman Brothers in 2008, showed no signs of distress during the lengthy political deadlock following the 2009 parliamentary elections, and today are once again proving resilient in the face of regional uncertainty.

In 2010 the consolidated balance sheet of all reporting banks and subsidiaries grew by 11.7% to reach $155.1 billion. Profits soared by 27.4% to reach $1.82 billion. With a general focus on cross-border operations, non-interest income, and credit extension to the private sector, Lebanese banks were able to increase their return on average assets (ROAA) and return on average equity (ROAE) ratios in 2010 to 1.24% and 13.90% respectively, up from 1.13% and 12.93% in 2009. On the efficiency side, the cost-to-income ratio dropped from 51.87% to an impressive 48.72%.

Lebanese banks are conservative and deposit rich, reflected in their equity-to-asset position of 9.01% in 2010 and a capital adequacy ratio exceeding 13%. Primary liquidity assets to deposits in foreign currencies was 51.53%. Additionally, asset quality increased, with the ratio of doubtful and sub-standard loans retreating from 1.88% in 2009 to 1.33% in 2010.

In terms of 1H2011 results, the five banks listed on the Beirut Stock Exchange—namely Byblos, BLOM, Audi, Bank of Beirut, and BEMO—showed aggregate net profits of $480.2 million, marking a 8.3% year-on-year increase. This robust growth follows a 20.4% increase in the first half of 2010. On average among the five listed banks, net profits grew 6.5% on the heels of a 1H2010 growth in net profit of 23.2%. The five listed banks recorded an increase in aggregate net interest income of 13.3%, growing from $648.8 million in the same period 2010 to $735.2 million. There are currently 54 commercial banks in Lebanon—a number that has varied by only one bank either way since 2003—with a total of 924 branches, up from 809 in 2003. The system holds $138 billion in assets and $114.5 in deposits, making it number four in the Middle East and North Africa (MENA) region in terms of deposits.

HISTORICAL EXPERIENCE

According to many in the sector, the ability of Lebanese banks to maintain consistent growth and healthy fundamentals regardless of external circumstances can be attributed to Lebanon's historic experience. “The turbulent war years made Lebanese bankers experts at risk aversion," Freddy Baz, Group CFO and Strategy Director for Bank Audi, told TBY. “Our ability to manage uncertainty is our competitive advantage." Risk aversion at the management level has been underscored by prudence and foresight at the regulatory level. For example, Lebanese banks have been forbidden from holding structured or derivative products since 2004, well before the global toxic-asset fallout. Additionally, equity acquisitions cannot be financed for more than 50% of the value of an investment, foreign currency must be less than 1% of total equity, banks must maintain a 12% minimum capital adequacy ratio, and lending cannot exceed 5% of shareholders' equity since 2005. Banks are also required to maintain at least 10% of their foreign currency liabilities as net liquid assets, and at least 15% as remunerated deposits at the Banque du Liban (BDL), the central bank.

In the midst of the global financial crisis, the Lebanese model of low leverage and credit discipline inspired confidence from depositors both inside and outside of the country, and Lebanese banks posted strong figures throughout the period. From 2007 to 2010, Lebanon attracted $65 billion in inflows, $47 billion of which were in deposits. This marks a 65% increase in deposits over the period.

DEPOSITS

Lebanese banks are clearly deposit rich, with deposits accounting for 83% of total funding. And once again, consistent deposit growth is proving immune to turmoil, this time in the form of unrest in neighboring Syria and uncertainty in the Arab spring countries. In the first half of 2011, bank deposits grew by $3.3 billion, or 3%, a figure nearly equivalent to the same period in 2010. In terms of distribution of bank deposits, 1Q2011 figures issued by the BDL show that term savings is the preferred type of account for both resident and non-resident bank clients in Lebanese pounds as well as foreign currency.

With a diaspora nearly three times the size of the country's population, Lebanon's deposit base is consistently fueled by remittances. In 2010 non-resident deposits were up 11.5%. According to Fitch's statement in July 2011, when it affirmed Lebanon's “B" rating with a stable outlook, the inflows continue to push down interest rates and dollarization.

Deposit inflows are generally following a de-dollarization trend, with dollar deposits dropping from 75% of the total to 63% in 2010. By October 2011 this rate raised slightly to 66.56%; however, de-dollarization looks set to continue across the medium term. This is thanks to large foreign exchange reserves, which underpin the stability of the pound, and central bank incentives that have encouraged lending in pounds, such as the removal of obligatory reserves relating to housing loans and student loans.

LENDING

Thanks to continued deposit growth, Lebanese banks are once again in a position to buoy the real economy. Increasing liquidity has allowed the banks to extend news loans amounting to $2.5 billion in 1H2011, a 13% annual increase.

According to the Association of Banks in Lebanon, the total value of loans granted by commercial banks reached $64 billion in late 2010. Of the total, 46% was allocated to the public sector and 54% to the private sector. Private credit growth was 24% in 2010, the highest in the Middle East. Figures issued by the BDL show that the trade and services sector accounts for 35.8% of private sector credits, followed by personal credits (24%), construction (16%), industry (11.6%), financial intermediaries (8.4%), and agriculture (1%), with other sectors accounting for the remaining 3.2%. Within the lead trade and services category, wholesale trade represented 42.2% followed by real estate services (20.6%), retail (16.7%), transport and storage (10.3%), hotels and restaurants (7.4%), and educational services (2.8%). In terms of loan beneficiaries, 78.1% were personal credits, while trade and services represented 12% of beneficiaries.

Besides fueling the real economy, the liquidity of Lebanese banks plays an important role in maintaining the balance of public finances through the subscription of treasury bills, although some see this high level of exposure to government debt as a possible chink in the system's otherwise iron-clad armor. Lebanese banks hold about 70% of the nation's debt, which is rated B1 by Moody's Investors Service, four notches below investment grade.

REGIONAL FOOTPRINT

A considerable amount of the sector's $1.82 billion in profits recorded over 2010 was generated by cross-border branches, subsidiaries, and affiliated companies. This reflects the ambition of several leading banks, whose balance sheets are outgrowing national GDP, to seize more business opportunities through overseas operations.

Some banks, such as Bank Audi, are aiming to become reference players for the region. Over the next three to five years, Bank Audi plans to double in size and become one of the top five regional banks. Currently they are in the top 20 among Arab banking groups in terms of asset size. BLOM Bank, which has the widest foreign presence among Lebanese Banks, is currently in 12 countries and also aims to become a top universal bank in the MENA region. Byblos Bank is close behind and also pursuing regional expansion. Credit Libanais, which recently added branches in Iraq to its international portfolio, plans on broadening its branch network on the scale of one branch every six months, according to Dr. Joseph Torbey, Chairman of Credit Libanais and President of the Association of Banks in Lebanon. In general, Lebanese banks are starting to provide a large spectrum of products to an integrated regional customer base, leveraging the significant cross-selling potential that comes from growing intra-regional trade.

THE LEADERBOARD

Bank Audi is ranked first in Lebanon in terms of assets, customers' deposits, loans to customers, shareholders equity, and net profits. In the first half of 2011 Bank Audi saw net consolidated earnings grow by 10.8% relative to the corresponding period of 2010. This comes despite an increase in net loan loss provision charges by 67% over the same period. Consolidated assets increased by $394 million over the period, reaching $29.1 billion at end-June. Consolidated deposits were up by $420 million to reach $25.3 billion at 1H2011. Over the same period shareholder equity reached $2.3 billion, representing 21% of the total equity of the sector and translating to an 11.3% capital adequacy ratio. According to a statement issued by the bank's management, they have followed a conservative strategy in 1H2011, focusing on consolidating the customer franchise and best asset quality.

BLOM Bank, a top three bank in Lebanon and a stalwart in the region, has 70 branches and affiliates in Lebanon and 84 abroad. BLOM posted a first-half net profit of $163.56 million in 2011, up 4.6% compared with same period last year. Total assets were up 7.44% to $23.11 billion and deposits rose around 10% to $20.45 billion. BLOM recorded the best ratios on profitability among listed Lebanese banks, scoring the highest rate of ROAE at 21% and the highest rate of ROAA at 1.54%. At the end of 2010, BLOM's consolidated Basel II Capital Adequacy reflected solid solvency with a ratio of 13.2%, well beyond the international minimum of 8%. Additionally, tier I capital increased by 12.5% to $1.85 billion, attributed mainly to increases in retained profits.

Byblos Bank, also in the top three in the country, was the biggest generator in profits, assets, and deposits in 1H2011. Its consolidated net profits of $84 million marked a 16% rise from the same period in 2010. Net interest income reached $145.1 million, up 12.5% year-on-year. Net fees and commission income increased by 16.2% and net income trading recorded a 36% increase in the first half of 2011. The bank continued to maintain a high level of immediate liquidity, as short-term placements with banks increased by 13.4% during the first half of 2011 and represented 30.8% of customer deposits at end-June 2011.

The Bank of Beirut, a leader in banking for affluent individuals and SMEs, operates in Lebanon through a network of 48 branches, 48 on-site ATMs, and 13 off-site ATMs. Its 3Q2011 earnings reflect a net profit of $76.1 million. Although this marks only a 0.2% increase compared to same period last year, assets and deposits went up significantly. In February, Bank of Beirut acquired 85% of the Australian operations of Marfin Laiki Bank as part of its expansion plans.

BankMed, one of the top five banks in Lebanon, holds around 10% of the total assets of the Lebanese banking system. The bank's unaudited consolidated net profit for the first half of 2011 was $59.4 million, up 13% on the same period last year. Operating profit rose by 21% to $70 million, with net interest income increasing by 23% to $106 million and net fees and commission income growing by 36.5% to $25.7 million year-on-year. Total assets reached $11.4 billion at end-June 2011, constituting a 2% rise from end-2010, while loans and advances increased by 11.3% from end-2010 to $3.2 billion. The bank's non-performing loans were covered by 219% in provisions, and its capital adequacy ratio stood at 11.1% according to Basel II criteria.

Fransabank, Lebanon's oldest bank, has the largest branch network in Lebanon. The bank announced unaudited consolidated net profits of $80.3 million in 1H2011, up 15.8% from the same period last year. Net operating income rose by 21.4% year-on-year to $207.2 million, with net interest income increasing by 24.7% to $151 million and non-interest receipts increasing by 25.3% to $61.4 million year-on-year. Also, operating expenditures increased by 24.4% to $106.7 million. Total assets reached $13.6 billion, constituting a 10.8% rise from end 2010, while loans and advances increased by 28.8% to $4 billion. Consumer deposits totaled $11.3 billion, up 11.6% from end-2010.