When the financial crisis ravaged the global economy in 2009, Lebanon’s banking sector profited from relative domestic political stability to achieve record-high growth. However, 2011, unlike any year in the past decade, has put the country’s resilient banking sector under pressure on three fronts simultaneously.
For the first time in many years, the banking sector, which is three times bigger than the Lebanese economy, is faced with a global financial slowdown and internal political uncertainty, as well as regional unrest, particularly in Lebanon’s larger neighbor Syria. The slow growth trend of the banking sector in 2011 will continue at least through the first half of 2012 and may see an improvement in the second half of the year if the gloomy regional picture brightens, banking officials told The Daily Star.
Nassib Ghobril, head of Economic Research at Byblos Bank, said that he expected the same trend of slow growth in deposits and profits to continue in 2012, mainly due to domestic political uncertainty in Lebanon and turmoil in Syria. “I don’t see the trend changing from 2011 if the situation in Lebanon and Syria remains the same,” Ghobril said.
For the first nine months of 2011, assets, deposits and profits all grew but at rates lower than those of 2010. The total assets of the Lebanese alpha banks – the 12 banks with deposits in excess of $2 billion – stood at $143 billion, a 6 percent year-to-date growth compared to the 11 percent growth in 2010 and 22 percent in 2009. Ghobril’s viewpoint on 2012 prospects for growth in the banking sector was shared by Joe Sarrouh, adviser to Fransabank’s chairman, who added that the second half of 2012 could see an improvement if the situation stabilized in Syria. “I believe the second half of next year will witness far more stability because we will have a clearer picture about the situation in Syria and the eurozone crisis,” Sarrouh said.
Deposits only grew by 5 percent year to date, standing at $118 billion, compared to the 2010 rate of 12 percent and the 2009 rate of 24 percent. However, Ghobril saw no risk of deposit outflows from Lebanon, which he said took place only following shock events such as the assassination of statesman Rafik Hariri in February 2005, the July 2006 Israeli war against Lebanon and the collapse of Prime Minister Saad Hariri’s Cabinet in January 2011.
The 2005 assassination of Lebanon’s former prime minister was followed by 5 percent in deposit outflows, 3 percent after the July 2006 war and $1.1 billion following the collapse of Saad Hariri’s Cabinet. Rather than fearing deposit outflows, which usually flow back in soon after a shock event, banking officials told The Daily Star that if Lebanon managed to maintain relative political stability, it might even attract foreign deposits due to the European Union sovereign debt crisis and low interest rates.
“International banks are being downgraded, the sovereign debt crisis is not resolved ... the world isn’t fine for individuals to take their money outside for very low interest rates. On the contrary, I think if you put political tension aside ... we will be able to attract deposits,” Sarrouh said. Profits grew by a marginal 1 percent to reach $1.2 billion in comparison to a stunning 25 percent increase in profits in 2010 and 18 percent in 2009.
The turmoil in Syria, which is weighing on Lebanese banks operating there, will have minimal impact on banks because the affiliates account for a small percentage of profits, Ghobril said. “Overall, the profits of Lebanese banks from branches abroad are not sizable,” he added. Ghobril said that Lebanese banks operating in Syria would continue to see a decline in their assets and deposits unless a positive unexpected development takes place.
The three largest Lebanese banks with branches in Syria, BEMO, Bank of Syria and Overseas – an affiliate of BLOM bank – and Audi Syria, saw their assets fall by an average of 24 percent and deposits drop an average of 29 percent through the first three quarters of 2011. Sarrouh said the current circumstances require conservative approaches to risk management but added that banks would still meet financial opportunities with a positive attitude. “Lebanese banks have tremendous experience in crisis management internally and externally ... the Central Bank is closely observing risk-management measures and I think provisions taken so far are satisfactory,” Sarrouh said.
The deteriorating situation in Syria was the major reason behind international rating agency Moody’s decision to downgrade Lebanon’s banking sector outlook from stable to negative earlier this month, citing the banks’ asset and loan exposures to Syria and other countries witnessing unrest. Some bankers said privately that Lebanese lenders operating in Syria have provided billions of dollars in loans to the private sector, although the ratio of default so far had not been too alarming.
Lebanon recently distanced its economic sector from that of Syria after the Arab League, the U.S. and European countries imposed sanctions on the assets of some high-ranking Syrian officials. Lebanese Central Bank Governor Riad Salameh recently denied that Syria’s government or its national bank had any assets in Lebanese banking institutions.
The banking sector has also felt the effects of the U.S. crackdown on Hezbollah’s financial operations after the U.S. Treasury Department in February designated Lebanese Canadian Bank as a “financial institution of prime money laundering concern.”
LCB was accused of laundering hundreds of millions of dollars for a Lebanese-Colombian drug baron with links to Hezbollah, which Washington has designated as a terrorist group. Societe Generale eventually bought LCB for an estimated $500 million.
Moody’s also noted slower economic growth in the first half of 2011 with the GDP sinking to less than 2 percent, as well as the banking system’s high exposure to Lebanon’s sovereign debt. Lebanese banks are the main subscribers to government treasury bills and Eurobonds, which make these banks more vulnerable to default risk in the future, especially if the state fails to seriously tackle the debt and budget deficit problem.
According to the Association of Banks in Lebanon, claims by commercial banks on the public sector stand at $30 billion as of the end of August and at $39 billion on the private sector. On the upside, the banking system has a strong liquidity buffer and resilient depositor base.
The sector retains a relatively stable funding structure driven by customer deposits, which account for approximately 90 percent, Ghobril said, downplaying any impact by the European crisis on Lebanon. While some say Lebanon is likely to see pressure to reduce interest rates on the Lebanese pound to support the budget, Sarrouh said he expected interest rates to remain the same. However, Alain Wanna, the assistant general manager and head of Finance & Administration and Financial Markets at Byblos Bank, said covering the cost of customer deposits has become very expensive for most commercial banks, especially since the yields on government treasury bills are relatively low.
“Lebanese pound treasury bills are trading in the secondary market at 50 to 75 basis points above the primary market. That is why banks prefer to buy from secondary markets as opposed to the primary,” said Wanna. “Most banks were buying the seven-year Treasury bill because the yield was around 7 percent. “But to buy bonds with a 6 percent yield while some banks are still paying on deposits around 7.5 percent ... it isn’t logical. I don’t know how it will be fixed,” he added.
As for the level of dollarization, which stands at 68 percent, Sarrouh said he expected the level to stay unchanged given strong confidence in the Lebanese pound with a large base of resident bank deposits.