Lebanese banks have registered an estimated profit of $1.6 billion in 2013 , thanks to interest on treasury bonds and clients. This marks a two-fold increase from last year, boosted by resolutions recently issued by the Lebanese Central Bank.
Though the Syrian crisis has taken a toll on the Lebanese economy in the last three years, Lebanese banks managed to make steady progress. In 2011, when the Syrian crisis erupted, Lebanese banks made a $1.5 billion profit. These profits increased in 2012 to reach $1.6 billion, with a similar amount expected in 2013, according to Central Bank Governor Riad Salameh, who also anticipated “a slight improvement."
How do banks make their profits? And what are the sources of such profits?
According to Joseph Tarabay, former chairman of the Lebanese Banks Association, 2013 bank profits are based on the fact that these banks “are still running Arab wealth." Every bank has its own profit-making method, but they all work within the framework of the Lebanese model. Though not necessarily “a positive model," it managed to survive so far. The banks’ aggregate balance sheet clearly reflects the repercussions of this so-called model.
By the end of 2013, the banks’ aggregate balance sheet reached $164.8 billion, compared to $151.9 billion at the end of 2012, meaning a $12.9 billion increase. In addition, bank deposits reached $141.2 billion, compared to $130.8 billion the year before, meaning a growth rate of 7.9 percent. Private-sector lending reached $41.5 billion, compared to $37.8 billion the year before, meaning a growth rate of 9.6 percent, equaling $3.66 billion.
Amounts invested in government bonds jumped to $37.66 billion, compared to $31.13 billion the year before, with a $6.53 billion increase, meaning a 20.9 percent growth rate. In 2013, banks deposed an additional $1.86 billion in the central banks, raising their total deposit to $54.3 billion.
These figures indicate that banks have been depositing funds into three portals: the central bank, government bonds, and the private sector, totaling $12 billion, meaning 93.1 percent from the total increase in the aggregate balance sheet. This suggests that banks benefited from all funds that entered the sector.
According to the calculations procedure adopted by the Lebanese Banks Association, which involves calculating profit margins in Lebanese pounds and in dollars, net profits from these amounts registered $155 million. Bank profit margins increased to 1.3 percent on the dollar and 1.26 percent on the Lebanese pound. Hence, profits from the total deposit portfolio, after calculating the reserve requirement, gave banks a profit of at least $1.6 billion in 2013.
Unfortunately, this doesn’t accurately reflect reality, but rather depicts a so called “banking sector model." If we are to disregard the calculation method, it would appear that the sources of banks’ profits are actually the most important factors. However, promoters of this “model” have been “neglecting the origins of the profits.”
According to Joseph Tarabay, former chairman of the Lebanese Banks Association, 2013 bank profits are based on the fact that these banks “are still running Arab wealth."
“Banks managed to keep their profitability last year. Some made progress, mainly banks that are not very active abroad. Meanwhile, widespread banks had to take provisions on their investments ,” Tarabay said.
He explained that the share of treasury bonds from the profits decreased in the past year, due to a low interest rate “but banks were able to compensate such decreases through an expansion in funding the economy – the private sector – while it was revealed that the bad debts rate is not that significant.”
Some cumulative data may reveal the sources of the banks’ 2013 profits. Last year, banks invested 34 billion Lebanese pounds in securities issued by the Central Bank, with an interest that amounted to 8.5 percent. In addition, banks raised interest rates on clients by .5 percentage points, which angered merchants and industrial officials.
Interestingly, banks are benefiting from Central Bank support,  which freed a large portion of the reserve requirement in Lebanese pounds. The reserve represents 15 percent of deposits in Lebanese pounds, and the latter represent 44 percent of deposits in the sector.) Furthermore, the Central Bank offered banks 2.2 billion Lebanese pounds ($1.4 billion) with a 1 percent interest. This amount was renewed in 2014, after it was revealed that banks only used $800 million from that amount, which mostly went to fund residential apartments.
Moving from cheap funding to “facilitations," sources revealed that banks received another “gift” from the Central Bank last year: a resolution allowing them to price stock assets based on their original, not market, price, and permitting them to keep the stocks until their date of maturity.
This resolution followed a decrease in the prices of stocks and bonds traded in the market to a level lower than their original prices, which meant banks would have to sustain losses. The source explained that an excessive accounting procedure raised the bonds portfolio of some banks by 20 percent.
A knowledgeable banker commented on the source of the profits, saying that real profits used by banks in their daily transactions, are the ones obtained through company and individual lending. Meanwhile, other profits are just on the books between the banks and the state, and the citizens pay the price.
By Mouhamad Wehbe