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French Version

Bankers expect new rules to spark consolidation

'Forty banks in a $20 billion market is too many' - and basel II may force a change

Lebanon's banks are heading for a wave of consolidation as a result of new international risk-management controls known as Basel II, key players in the industry said Monday.

Putting Basel II's myriad requirements into practice will increase costs and capital-reserve needs, and many smaller banks will likely look to merge or find buyers as profits decline, several bankers told The Daily Star on Monday.

Basel II, which takes effect in Lebanon on January 1, 2008, defines various types of risk - such as operational, capital and market - and institutes standard methods for quantifying risk. It also outlines an organizational approach to risk management, establishing new layers of corporate governance to monitor risk.

Banks have already begun pushing their clients to ratchet up their transparency and reporting in anticipation of the new measures, which could also affect how domestic banks deal with their foreign creditors.

"It is a comprehensive risk-management framework," said Pascale M. Dahrouge, who is overseeing the implementation of Basel II at Byblos Bank. "Basel provides a more advanced way to calculate risks. The impact is tremendous. Basel is here to tell you, 'This is what you should do.' It is banking at a very high level."

For local banks, the strict new calculations will roughly double the amount of bank assets considered high-risk, and lenders will have to create capital reserves to cover the risk, said Fadi Zablit, assistant general manager of Al-Ahli International Bank. The country's largest financial institutions should be able to install the mammoth new system without much damage to their bottom lines, but smaller banks will feel more pressure, in addition to extra costs for new personnel and technology to track risk.

"Of course it's going to increase costs because the organization will change," said Zablit. "You will be obliged to create new functions. You have to invest in a risk-management system. The big issue is the equity issue - you have to double your capital. Many small banks will not be able to support Basel II."

The push toward consolidation will gain speed as smaller banks see profits fall as costs increase; Lebanon's leading banks, which reported healthy profits in 2006 despite the summer war with Israel, believe Basel II will lead their profits to rise in the future.

"Once Basel II is implemented the right way, it will have a very positive effect on profitability, but not in the short term," said Paul Chucrallah, assistant general manager of Byblos Investment Bank. "Some of the smaller banks may not be able to withstand it. The normal consequence of such a thing would be to trigger a wave of consolidation."

Bankers said they do not expect big domestic banks to swallow up the local minnows - the small fry are not that financially attractive. What might attract investors is the license for banking in Lebanon, where the banking sector has long been the backbone of the service-dominated economy and a hub for financial services in the Middle East. the Banque du Liban has been reluctant to issue new banking licenses, and investors - most likely from the Gulf - might perceive the Basel II aftermath as a prime opportunity to enter the Lebanese market.

"There is bound to be some consolidation in the banking sector from outside the system, not from within," said Saad Andary, deputy general manager of the Bank of Beirut and Arab Countries (BBAC). "The license becomes of value - (Bank) Audi doesn't need another license."

Other bankers were skeptical that foreigners would invest in Lebanon with its ongoing political instability, expecting instead a number of mergers among banks with about $300-$700 million in assets. Lebanon's banking sector has been crowded for some time, and Basel II might well represent the tipping point that brings about the inevitable consolidation.

"Forty banks in a $20 billion market is too many," said Dahrouge, who has been giving Byblos Bank colleagues a several presentations a year to prepare them for the new standards. "[Small banks] will not have sufficient revenue to survive. They need people to follow up; they need systems, a dedicated risk manager and a team. You cannot rely on Excel spreadsheets to manage risk.

"I thought [consolidation] would happen before," he added, "[but] 2007 is the year."

Basel II has engendered criticism as favoring the large banks which can more easily implement and meet its stringent obligations. As a result, goes the argument, developing countries will suffer because their banks cannot fulfill the requirements and big banks rarely go there. In the end, critics say, the economically disadvantaged will only see their already limited access to credit dry up, or at least become more expensive.

But several Lebanese bankers said their lending to the private sector would, if anything, increase because they need to offset the dismal risk ratings of the heavy share of Lebanese government debt in their portfolios. To increase the credit ratings of commercial customers, banks are pushing corporate-governance reform on local firms: BBAC's Andary has been visiting clients to help them enact the accounting transparency and reporting steps that would lift client ratings.

"What is happening now is that because of being more conscious of weighing risk, we are going out to clients and helping them upgrade their systems, improving their ratings," Andary told The Daily Star. "[Basel II] doesn't mean that we abandon clients - it means that we work with clients to improve the whole risk environment. We have become aware [of the need to] to upgrade the systems of our clients, not just ourselves."

Lebanese banks need to improve the ratings of their debt - because of the high risks in much of Lebanese banks' portfolios; Basel II might make it more difficult for them to find loans abroad.

"In all countries rated below investment grade, there will be a more thorough consideration for lending to these countries," said Joe Sarrouh, executive adviser to the chairman of Fransabank. "The sector is a net creditor now in the international banking community."

Concerns about their low credit ratings might also make some banks think twice about purchasing any future issues of Lebanon's D-minus-rated sovereign debt, but the government, already flush with cash following January's Paris III donor conference, should not have a problem finding takers for its bonds, which have brought steady profits to domestic banks for years.

Beirut 27-02-2007
The Daily Star

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