Political instability and the syrian conflict have led to downward revisions on growth projections for the banking sector and wider economy in Lebanon. But the Lebanese banks have far from met their match. Rebecca Spong reports


With the political crisis in Syria escalating, downside risks to Lebanon’s growth and external position have considerably exacerbated,” read a statement issued by Barclays Capital in early April.

This followed a comment made by the IMF last November that suggested Lebanon’s economy had “lost momentum”.

“Growth could increase to 3-4% in 2012. But risks are high and to the downside, reflecting among others an uncertain global and regional environment, particularly in Syria,” said IMF representative Kristina Kostial during a visit to Beirut last November.

In 2011, private sector lending fell from US$6.6bn in 2010 to US$4bn and economic growth collapsed from 7% to 1.5%.

To further worsen the outlook for 2012, the Lebanese government has failed for the seventh consecutive year to ratify its budget due to political divisions, leaving the current government restricted on its capital spending capacity and its ability to implement economic structural reform.

The country’s parliament missed a constitutional deadline to submit its draft 2012 budget and there have been ongoing conflicts within the cabinet about proposed tax increases over the course of 2011 and into this year.

Barclays Capital has also predicted that Lebanon’s fiscal deficit is likely to widen to 9% of GDP this year, from the 7.9% of GDP in 2011.

Bank strength

Typically the banking sector in Lebanon weathers such economic and political downturns without too much hassle. The country has been used to picking itself up after political uprisings, the assassination of its former prime minister Rafiq Al Hariri in 2005 and outright war between Lebanon and Israel in 2006. The banks escaped the global financial crisis relatively unscathed as well.

With a tradition of conservative lending and significant deposit base fuelled by remittances from the Lebanese diaspora, the Lebanese banks might carry a few wartime scars but they are usually well-equipped to battle on.

However in December last year, the rating agency Moody’s changed its outlook on the Lebanon banking system from stable to negative. The outlook on all rated Lebanese banks was also moved to negative.

The report highlighted a number of risks that could throw the country’s banks off-course, including the impact of regional political uncertainty, referring to the wider Arab Spring uprisings in Egypt and other countries, and more specifically the continuing conflict in neighbouring Syria.

It also referred to the slower economic growth witnessed in the country and the agency revised its expectations for real GDP growth in 2012 from 5% down to 3.5%.

It stated: “We expect Lebanese banks’ profitability to come under pressure over the outlook horizon.”

And indeed although the Lebanese banks continue to post profits, the profits are slowing. In 2011, the average increase of profits for the top 12 banks in Lebanon was 1.2%.

“That’s a very big difference from 2010, where growth of those same banks was in excess of 24%,” remarks Nassib Ghobril, chief economist at Byblos Bank.

The Moody’s report even pinpointed trade finance as an area that could come under pressure due to the fact that over a quarter of all Lebanese exports are routed through Syria, where the ongoing conflict could disturb trading routes, thus affecting those banks active in providing trade finance.

Moody’s states that lending to the trade sector could be a “source of rising problem loans”, since trade finance represents the banking sector’s largest industry concentration, at 24% of rated banks’ total loans.

The escalation of international sanctions on Syria is likely to have further negative implications for Lebanese banks, noted the report.

In early April, the rating agency placed on review for possible downgrade the Ba3 local currency long-term deposit rating and the D standalone bank financial strength ratings of Bank Audi, Blom Bank and Byblos Bank.

The Syria factor

With an exceptionally shaky ceasefire in Syria currently in place, the future of Lebanon’s neighbour is still very much undetermined. Likewise, the impact on the Lebanese trade and the banks’ trade finance activities has yet to fully materialise.

Karim Nasrallah, managing director, at the Lebanese Credit Insurer (LCI) comments: “It is a major concern that no one is able to quantify, especially if the situation in Syria deteriorates and the transit of goods is interrupted.”

He explains that his business has been affected in that LCI has had to cancel cover on the Syrian market, cancel export limits on Syrian buyers and also stop selling credit insurance to Syrian companies.

“We have not seen a direct impact on Lebanon as a whole but definitely if the situation stays like this for a long time we will see more signs of a slowdown,” he tells GTR.

He notes that Syrian business in 2010 represented around 10% of the company’s portfolio.

Looking at export and import statistics for Lebanon, exports to Arab countries in January 2012 have dropped in value by 28%. However, overall exports rose by 17%, fuelled by rising international gold and silver prices, boosting Lebanon’s key exports of jewellery.

Over the course of 2011, exports to Syria contracted by 3%, but statistics suggest that the turmoil in Egypt has had more impact on export volumes, with exports dropping by 66% to the country in 2011 and falling by 72% in January this year.

The Syria conflict has seemingly only marginally affected Lebanese banks’ trade finance activity so far. Of course, those Lebanese banks with Syrian operations have seen a significant reduction in business, with Bank Audi Syria reporting a contraction of assets by 52% between March 2011 and March 2012. However, in Lebanon itself, trade financiers have not yet seen a dramatic impact.

“In terms of number of trade finance transactions, particularly letters of credit (LCs), import and export LCs, numbers were slightly down in 2011 and the first two months of this year, compared to 2010,” remarks Maurice Iskandar, head of the international division, at Banque Libano-Française. However he notes that volumes of transactions remain relatively stable and that there has been an improvement in the number and volumes of collections.

Looking to the rest of 2012 he tells GTR that there will be continuing pressure on volumes, due to the on-going problems in Syria and other nearby Middle East countries.

Banque Libano-Française has been traditionally very active in Syria and Iskandar estimates that Syrian-related activities would usually account for 15-20% of the bank’s overall trade finance volumes.

But, he adds: “We don’t think the impact will be as dramatic as expected; the drop in the Syrian business will be compensated by activities in other regions.”

Felix Tohmé, head of group financial institutions department at Byblos Bank, comments: “You have to be realistic. The Syrian and Lebanese economies are linked and if trade can’t flow between the two economies, then the banking sector will be affected one way or the other. But I think the profitability is not going to be greatly affected, especially since the bigger banks are quite diversified now.”

“We have not seen a dramatic rise in non-performing loans,” he adds.

Ghobril at Byblos Bank further comments: “Obviously there will be a decline in consumer confidence in Lebanon and a wait-and-see approach taken by consumers will slow down the volume of imports to Lebanon given that we are an import-based economy.”

He also notes that although trade with and through Syria did not grind to a halt; it has become more expensive.

“Lebanon exports to a significant part of the Arab world and most goes through Syria. That route has not physically been closed, but the cost of transport has increased and insurance has also increased.”

A positive light

Signs of typical Lebanese resilience are beginning to appear amidst the negative projections. In April Bank Audi has announced in its Q1 2012 results, revealing that its net profit was US$94.5mn, an increase of 4.5% compared to the first quarter of 2011. This figure was achieved even though it had to make provisions of US$31.2mn.

The bank also reported that consolidated assets reached US$28.7bn at the end of March 2012 despite contractions in the asset base of Bank Audi Syria.

However, in an official statement Bank Audi does state that the turmoil in the nearby Arab states continues to impose “a relatively challenging environment for Lebanese banks with regional operations”.

There are some voices in the market that believe the resilience of the Lebanese banking sector is of such strength that the negative outlook imposed by Moody’s was incorrect in the first place.

“I think the rating agencies have missed the boat on a number of crises and they now tend to be biased towards conservatism and their conservative bias pushes them to take action that in my opinion is not warranted,” argues Iskandar at Banque Libano-Française.

“We have taken provisions on exposure to Syria and taken provisions on exposure to various countries we operate in and still we continue to show good results.”

He believes that the Lebanese banking sector has been underrated for a number of years despite displaying what he says is an “outstanding track record in meeting obligations”.

“Despite instability, security disturbances and economic problems and regional considerations, Lebanon has been able to maintain an excellent credit profile,” he says.

Indeed, the Moody’s report does note that the banking sector retains a solid funding structure driven by customer deposits.
What has further helped strengthen Lebanese banks in the past and in today’s environment is their ability to expand into new markets to diversify their activities.

Tohmé at Byblos Bank comments: “We are starting to look at markets we haven’t paid attention to and we have to continue to manage our portfolio so we make sure we stay on top of things.

“We see a lot of trade finance regionally; there is a lot of oil business in Iraq. We are also looking at opportunities in Africa in countries such as Nigeria, Ghana, Uganda and Kenya.”

Banque Libano-Française and Fransabank are both set to start operating in Iraq in July this year alongside a number of Turkish banks all looking to carve out a presence in a market dominated by inefficient, uncompetitive Iraqi institutions.

Eurobond success

A further sign of an active and strong banking sector flush with liquidity was the closing of a US$950mn eurobond issue for the Lebanese government in March this year. The deal will be used to refinance two previous eurobonds maturing this year.

The foreign ministry originally wanted to raise US$700mn in eurobonds, but the issuance achieved a 30% oversubscription. It was the first foreign currency market transaction executed by Lebanon in 2012 to refinance maturing debt and it paid a coupon rate of 6.6%. Byblos Bank and Bank of America Merrill Lynch were lead managers on the eurobond.

Ghobril at Byblos Bank notes that the recently-placed dual-tranche eurobond achieved attractive low rates due to domestic and external demand, as well as to the fact that the majority of subscribers are highly liquid Lebanese banks. “It is a good sign to see the low rates on these eurobonds. These are very low rates if compared to the sovereign ratings of Lebanon.”

However, Ghobril notes that rather than refinancing these bonds at favourable rates, he would ideally like to see the government retire the eurobonds as part of wider efforts to improve the management of public finances and reduce the fiscal deficit.

Indeed, he believes that rather than the external political conflicts of Lebanon’s neighbours being the primary cause for concern; it is the domestic political uncertainties and volatility that could have the biggest impact on the Lebanese economy and banking sector.

Although the level of public debt declined from 180% of GDP in 2006 to 135% of GDP at the end of 2011, this decline was almost exclusively due to the growth of the economy with real GDP growth averaging 8% annually between 2007 and 2010.

The nominal size of the public debt has not been decreased, which Ghobril puts down to the fact that Lebanon’s government had been unable to implement structural reforms to reduce the borrowing needs of the government.

“That is why we are continuing to have large fiscal deficits – that is the main issue here and the main point of vulnerability,” he asserts.

These domestic issues will come to bear a bigger impact on the banking sector due to the fact that the banks still derive on average 85% of their profits from the Lebanese economy, despite its efforts to diversify into the Middle East, North Africa, Sub-Saharan Africa, Central Asia, Europe and Australia over the last decade.

“The slowdown in the region, in Syria, Egypt and Jordan has had an impact, but the bigger impact was the slowdown in the local economy due to political shocks and uncertainty we saw in 2011,” Ghobril explains.

The combination of this domestic stagnation coupled with political instability outside Lebanon’s borders will clearly reduce lending opportunities, including trade finance, for Lebanese banks.

The Lebanese banks do not operate in a vacuum, immune from these external conditions; however they are equipped with steady profits, an ever-widening network of banking operations, alongside good capital adequacy and high levels of liquidity. They will be keen to prove the rating agencies wrong this year. GTR