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Buoyed by record profits and wounded competitors, Lebanese banks zero in on trade finance, writes Nicholas Noe.

Once regarded as a premier banking hub, Lebanon’s fortunes declined substantially over the course of its bloody 15-year civil war (1975-1990) and lengthy post-conflict reconstruction phase.

As Bahrain, the United Arab Emirates (UAE) and, to a lesser extent, Saudi Arabia stepped into the breach with an aggressive programme of financial liberalisation, Lebanon came to be seen as something of a banking backwater – small in size; risky, given the political climate and high debt to GDP ratio of the country (now pegged at a whopping 162%); but at the same time overly conservative, with a range of ‘exotic’ financial instruments prohibited or greatly restricted by the central bank.

As is well recognised now though, Lebanese banks performed remarkably well during the latest instalment of political turmoil and outright war between 2005 and 2008.

Moreover, during the last two years of financial dislocation that substantially degraded the positions of dozens of banking heavyweights in the Gulf, Saudi and, of course, Europe and the United States, the sector actually managed to post double digit gains across a range of key indicators.

According to an August 2009 report by the country’s number one bank, Audi-Sarader, the sector’s total assets increased from US$101bn in 2007 to US$112.1bn in 2008 (assets grew by US$9.4bn over the first half 2009, nearly 50% higher than the previous half year’s growth). Net profits also increased 26.7% in 2008, continuing a six-year positive, double-digit annual growth rate.

By comparison, Middle Eastern banks generally saw a decline of 20.7% in net profits in 2008, and a 19.4% drop in overall assets.

As such, Lebanese banks have not only weathered the current storm but have also actively, and successfully, exploited prevailing conditions by moving into areas and expanding their client base at points where others have been forced to pull back.

Indeed, as one proof of this, the share of international assets of Lebanese banks now stands at almost 30% of total assets, up from an estimated 10% in 2002, with some, like the big three of Audi, Blom and Byblos, opening dozens of new offices over the past two years from the Gulf, to Egypt and closer to home in the burgeoning, and increasingly liberalised, Syrian market.

Focus on trade finance
Significantly, according to several top Lebanese bankers interviewed by GTR, trade finance now stands at the centre of their regional push and overall growth strategies, undergirded by the country’s traditional role as trade facilitator beyond its own modest borders. (Imports and exports totalled only US$16.1bn and US$3.4bn respectively in 2008.)

Although independent figures are unavailable, the consensus in Beirut is that when it comes to the Middle East, perhaps as much as 30% of non-hydrocarbon trade finance transactions now pass through a Lebanese bank.

For its part, Byblos Bank, the local leader in trade finance, pegs its overall volume of business in the sector at more than US$8bn in 2008, buoyed by a 62.2% jump year-on-year in LC [letter of credit] transactions, which alone totalled US$5.5bn. (The countrywide volume of LCs used for domestic imports was US$4.8bn and US$3.2bn for exports in 2008.)

“Regionally, the absolute volume of trade finance transactions is, of course down, but the number of transactions is increasing,” notes Najib Semaan, the head of global markets division at the Bank of Beirut which took second place in 2008 with an estimated US$6.8bn in overall trade finance business, an increase of 20% year-on-year.

“For the Lebanese banks, we are actually benefiting in this environment from several factors: first, the equity of foreign banks went down substantially so they cannot afford doing business on the trade finance level as in the past and, on top of this, they are trying to sell part of the risk to local banks.”

“Second,” Semaan adds, “the situation of the Lebanese banks is recognised as being better than before the crisis, with a renewed confidence in the regulatory and operating environment here that avoided many of the pitfalls which others fell into.

“And third, some of the past transactions that were covered simply by direct transfers without a letter of credit or trade finance transaction are now being covered by traditional instruments” – instruments in which the Lebanese banks have long excelled.

“All of this has encouraged us to become more active in the region on top of the fact that we know the region better that the foreign banks,” Seeman concludes.

“There is a tremendous untapped demand for trade finance in the Middle East,” agrees Abdul Salam Chebaro, the head of trade finance at Audi, which estimated its traditional domestic trade finance volume at over US$2.4bn in 2008.

“But the focus is now back on the traditional instruments on which the region was always dependent.”

According to Chebaro, 52% of all trade business in the Middle East is supported by a conventional transaction like documentary credits.

“The Middle East represents 10% of world trade but 20% of the LCs employed. That is a very high number. It means that even as people were talking about all kinds of exotic instruments – and that traditional approaches to trade finance were becoming extinct – the fundamentals of trade activity in the region were continuing on a different path.

“The financial crisis pushed this reality back into the limelight, and created an awareness that you can and should only innovate on your customers carefully and gradually.”

“We prefer not to get involved in transactions that are very complicated, although we are studying them as far as trade finance is concerned,” remarks one senior manager at another large Lebanese bank.

Although his institution did a comparatively modest volume of trade finance transactions in 2008, he stresses that he is at ease with a careful approach to the sector.

“We focus on documentary credits, import-export credits, letters of credits and a number of other transactions…. There is still a big range, but, yes, we are very selective and conservative.”

For BankMed’s Ziad Ghosn, however, the strictly conservative approach may be suited for an institution whose other operations are already conducted on a fairly large scale, but in order to join the top tier of Middle East banks, which BankMed says it aspires to, more is needed.

“We have done a good job trying to be creative in the trade finance sector while maintaining the traditional conservative and risk-averse approach,” the head of financial institutions and trade finance says, noting that 2008 was a capstone year with a more than 70% year-on-year jump in LC volumes.

“You can do both. In addition to the standard trade services offered to our clientele, we also offer specifically tailored trade solutions for our customers.”

Ghosn stresses that as a key part of their growth strategy, BankMed has been actively increasing its volume of trade transactions on the secondary market, a line which has bloomed for domestic players mostly after the financial crisis.

“It has started to develop recently here and it requires some technical skills, which we surely have and we are geared to grow.”

“Lebanon’s comparatively risk-averse banks,” he adds, “are now well-positioned to benefit from the trade finance opportunities presented due to their strong financial standing.
Indeed, for Ghosn and others, the moment has proven ripe for striking just such a balance.

With large international institutions and even regional banks seeking liquidity, the secondary trade finance market in the Middle East has grown flush with opportunities that a growing number of Lebanese banks now seem comfortable in tackling – all the more so as their institutions’ underlying financial positions have strengthened.

“We buy on the secondary trade finance market, we deal with emerging countries, engage in silent participation, silent confirmation, funded/unfunded transactions almost all different levels of trade finance instruments – including complex transactions. So who said we are not aggressive when it comes to trade finance?” laughs Bank of Beirut’s Semaan. “However, we are risk-oriented,” he adds.

“The truth is,” retorts Karim Nasrallah, head of Lebanon’s only trade credit insurer, LCI, “that the big banks here have been invested in traditional banking – and, yes, it is one major reason why they were so resilient during this crisis”.

“But this has also meant that they have not developed on the trade finance side as quickly as they could have, and that the small to medium-sized companies, especially, have not been adequately serviced.”

For Nasrallah, this has provided an attractive opening, with LCI, and its related entity LCI Factors, leading the way in providing what he described as a range of relatively more “innovative” instruments.

“Trade finance done by banks in Lebanon is overwhelmingly done on the back of real guarantees and securities – we are doing business, as one example, on the receivables – banks simply don’t take that as a guarantee or an asset.

“The only thing keeping us from going faster,” he adds, “is the awareness in the local and regional marketplace that alternative trade finance instruments are available and can make your business work.”