NOT SURVIVING, THRIVING

Lebanon 2013 | FINANCE | REVIEW: BANKING

Proving that extremity makes you stronger, Lebanon's banking universe has seen all politics and the economy can throw. It could teach a cat a thing or two about risk-aversion, and as a result underpins the national economy.

Having braved a lengthy civil war and the sound of the global credit crunch, Lebanese banks have grown thick-skinned. Conservative management and prudent systemic regulation also enabled the banks to survive internal political deadlock following the 2009 parliamentary elections. In general, Lebanese banks seek to provide diverse products to an integrated regional customer base, leveraging the significant cross-selling potential that comes from growing intra-regional trade, not to mention catering to a vast and dispersed diaspora.

THE NUTS & BOLTS

There are currently 54 commercial banks in Lebanon. Over the 2010-2012 period following the Arab Spring, Lebanese bank assets posted a compound annual growth rate (CAGR) of 9.7%. Meanwhile, private sector deposits saw a CAGR of 9.3%, while loans to the private sector saw a CAGR of 16.2%. In 2012 consolidated bank activity rose 8.4% year on year, with total assets reaching $181 billion as of end-December. And as of June 2013 total assets stood at $158 billion, 8.6% up year on year from $146 billion. The sector overall posted a consolidated net profit growth of 7.4% for 2012, after a 5.1% decline in 2011. The aggregate profits of the listed banks for 1H2013 declined by 5% to $502.7 million. Meanwhile, on the efficiency front, their cost-to-income ratio rose from 43.4% to 44.5% in 1H2013.

Lebanese banks are conservative and deposit-rich, and an analysis of cost efficiency reveals a cost-to-income ratio of 47% for the alpha caste. In terms of the return ratios of Lebanese banks, ROAA was at 1.1%, with ROAE at 12.3% in 2012, and static year on year. The 1H2013 results reveal that the five banks listed on the Beirut Stock Exchange (BSE)—namely Byblos, BLOM, Audi, Bank of Beirut, and Bemo—had aggregate net profits of $502.7 million, down 4.8% year-on-year from $528 million. This decline reflects the 18% drop in Bank Audi's first-half profits. These five recorded a rise in aggregate net interest income of 4%, from $753.9 million in the same period 2010 to $784.3 million.

LEARNING FROM EXTREMITY

Risk-aversion at the management level has been underscored by prudent regulation and policy. For example, Lebanese banks have been denied structured or derivative products since 2004, four years before the toxic cough in the US. 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 (CAR), and lending cannot exceed 5% of shareholders' equity. Lebanese banks' consolidated Basel II capital adequacy ratios were at 13% at end-June 2013 according to the central bank, the Banque du Liban (BDL). 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 BDL. Lebanese banks thus see light during the most overclouded periods.

DEPOSITS

Lebanese banks are deposit-rich and this has continued to fuel business growth in 2013 by accounting for 83% of total funding. In 1H2013 deposits grew by 5% year on year to $131 billion, a $6.3 billion annual rise. Despite regional tension, the key obstacle facing Lebanon's economic status, the figure was marginally higher than that posted the year before, confirming the banking system's resilience to Syria's civil war and other regional uncertainties. With a diaspora nearly three times the size of the country's population, Lebanon's deposit base is consistently fueled by remittances. In terms of 1H2013 deposit distribution, residents and non-residents were almost equal contributors to deposit growth, with 84% of the total deposit increase coming from foreign currency savings. For 2013, non-resident remittances are estimated by the World Bank at $7.6 billion, up 4.4% from $7.3 billion in 2012, and amounting to 17% of GDP.

LENDING

The Lebanese banking sector's increased deposit base has theoretically enabled lending, in turn supporting growth of the real economy to continued deposit growth. Yet borrower caution due to prevailing uncertainty meant 1H2013 lending to the private sector rose just 3.2% year on year. The 1H2013 volume rise of $1.4 billion was 41% down on the respective 2012 number. Lending to the private sector by currency reveals approximately 60% of total new loans being FX-denominated. Lebanese banks hold about 70% of the nation's debt, which is rated B1 by Moody's Investors Service, four notches below investment grade. 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. Yet high exposure to government debt has raised eyebrows. In fact, regional disarray took its toll on the Lebanese banks in 2013 when on May 15 Moody's downgraded the outlook on the long-term local-currency Ba3 deposit ratings of the three big guns—Bank Audi, Blom Bank, and Byblos Bank—from stable to negative. The move closely followed its outlook change for Lebanon's B1 government bond ratings to negative.

Overall lending activity has declined in 2013, and sensing a threat to national growth from regional turmoil, the BDL has attempted to spur lending growth to the private sector to keep the wheels of the economy turning. Its latest foray involves an incentive of around $1.47 billion directed at the economy, taking the shape of loans to local banks at 1% interest. Partly, the idea—running till end-2013— is to facilitate reduced-interest loans of 5%-6% to the housing sector, a key growth engine, though SMEs and business have not been left out.

THE MAJOR LEAGUE

Bank Audi ranks first in Lebanon in terms of assets, customers' deposits, loans to customers, shareholders equity, and net profits. Consolidated activity highlights for the first half of 2013 reveal $33.7 billion in total assets, up 7.6% relative to end-December 2012. The bank had first-half profits of $188 million. Consolidated 1H2013 assets were at $30.7 billion, up 7.6% year on year, with a 37% contribution from foreign remittances. Net profit stood at $188 million. Key performance indicators reveal a 2.3% gross doubtful loans to gross loans ratio, a 0.49% net doubtful loans to gross loans ratio, and 16.2% ROAE. Net profit slid to $188 million, down from $230m in the same period of 2012, due mostly to the $44.5 million sale of its 81% majority stake in insurance company LIA. Looking abroad, Group CFO & Strategy Director Freddie C. Baz told TBY that, “we are actually looking to generate $45 million in profits from Bank Audi Egypt in 2013, after provisions and taxes." Meanwhile, a fully-owned subsidiary in Turkey, Odeabank, posted growth in assets of $5.8 billion at end-June 2013.

BLOM Bank, a top-three bank in Lebanon and a respected regional presence, has 70 branches and affiliates in Lebanon and 84 abroad. Net profit in 1H2013 was at $175.84 million, up 6.4% on the same period of last year, despite what the bank labeled “challenging operating conditions in Lebanon and the Middle East." Assets posted a rise of 6.1% to $25.27 billion, while deposits appreciated 5.7% to $22.06 billion. It had a cost-to-income ratio of 39% in 1H2013.

Byblos Bank, also among the top three in the country, and with operations in the Middle East, Africa, and Europe, posted a $76 million net profit for 1H2013, down from $80 million in 1H2012. Net interest income reached $119.4 million, down from $125 million year on year. Net operating income reached $195 million down from $217 million a year before, and the cost-to-income ratio was at 43.7%. Total assets were at $17.6 billion, up 35.9% year on year, while net loans and advances registered at $4.1 billion, flat year on year. Customer deposits in 1H2013 stood at $13.9 billion, up 5% from end-2012. Impressive among its Lebanese peers, Byblos Bank's primary liquidity, comprising dues from central banks and commercial banks, was at $9.2 billion, at 65.7% of total deposits as of end-June 2013. This was one of the highest liquidity prints of the local sector.

The Bank of Beirut, a leader in banking for high-net-worth individuals and SMEs, operates in Lebanon through a network of 48 branches. Its 1H2013 earnings point to a net profit of $59.8 million, up 15% year on year. Assets and deposits respectively rose 1.8% and 0.1% to $11.5 billion and $8.95 billion in 1H2013, while loans fell 1.4% to $3.47 billion.

BankMed, one of the top five banks in Lebanon, holds around 10% of local banking assets. The bank's unaudited consolidated net profit for 1H2013 was $67.9 million, up 5.9% on the same period last year. Net operating income climbed 6.4% to $217 million, with net interest income slipping 8.8% to $106.5 million. Net fees and commission income rose 21.1% to $29.4 million year-on-year. Total assets registered at $13.8 billion by end-June 2013, constituting a 10% rise from end-2012, while loans and advances rose by 6.1% to $4.1 billion. Customer deposits were at $9.5 billion, up 2.4% year on year, and the loans to deposits ratio fell to 38.5% at end-June.

Lebanon's oldest bank, unlisted Fransabank, has the largest branch network in Lebanon. It announced unaudited consolidated net profits of $72 million in 1H2013, up 10.4% from the same period of last year. Net operating income rose by 6.8% year-on-year to $209 million, with net interest income falling by 0.7% to $163 million. Net fees and commissions receipts rose by 3.7% to 28.7%, while non-interest income accounted for 25% of total income compared to 21% in 2012. Total assets reached $16.2 billion, up 2.4% from end-2012 and 8.7% year on year, while loans and advances increased by 5.1% to $5 billion. Meanwhile, consumer deposits rose 9.6% year on year to $13.5 billion, and the loans to deposit ratio inched up to 36.7% from 36.3% year on year as at end-June 2013.