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Banking sector faces new challenges in 2004 - financing national debt is becoming increasingly risky (Daily Star)

There is light at the end of the tunnel. That is the impression bankers give you when they discuss the political and economic situation in the country. This positive picture of the economy is not surprising once we understand the nature of these statements.

The banking sector, which is the pride of Lebanon, was probably one of the few areas that managed to escape unscathed from the vicious fallout of the economic recession. Leading banks managed to maintain their steady profits and in some cases they even recorded better results than in 2002. For decades, Lebanon’s banking industry was seen as a showcase for the country and at one point, before the civil war, was considered the strongest banking sector in the Middle East.

According to the Central Bank, total profits for commercial banks fell 20 percent to $348 million in 2000, compared to $436 million in 1999 and $503 million in 1998. But in the first nine months of 2003, the picture changed. Consolidated profits rose by 8 percent while assets jumped by 12 percent to reach more than $58 billion.

However, many bankers agreed that profits were likely to drop between 15 and 20 percent in 2004 depending on the level of economic activity. “The days of hefty profits are gone,” one financial analyst said, adding that banks must look at innovative products to produce new revenues and profits.

BLOM, the largest bank in the country in terms of assets, recorded a net profit of $66.1 million in the first nine months of 2003, a rise of 7.5 percent compared to 2002. Banque Audi also made a remarkable achievement after recording net profits of $40.6 million in the first nine months of 2003, up 42.64 percent compared to the same period in 2002.

The general manager of BLOM, Samer Azhari, expressed his satisfaction with the results: “The bank felt that it had to maintain a higher liquidity, and despite this we remained flat,” he said, referring to the bank’s policy of maintaining high levels of cash and cash equivalents.

The banking system has been effectively geared toward financing the debt-ridden government with the Central Bank discreetly convincing Lebanon’s 75 family-dominated banks to lend money to the state when almost everyone else thought it was too risky. The banks have benefited handsomely by assuming the country’s sovereign risk.

The majority of their profits after the 1975-90 civil war came from buying Lebanese pound Treasury bills, yields of which reached around 40 percent in 1995. Public debt was negligible before the war, when Beirut’s open economy and strict banking secrecy made it the deposit house for Gulf countries with undeveloped banks.

As public debt rose after the war to finance reconstruction, fears over currency stability grew and the economy became dependent on the dollar with 67 percent of last year’s deposits made in dollars and the government issuing more Eurobonds.

Financing the state created a pattern of easy profits, but provided little incentive for most banks to modernize a family management structure, diversify revenue and prepare for a downturn when interest rates finally fell. A worsening economy forced banks to restrict their lending and transfer a large proportion of their profits to provisions on bad loans.

The Central Bank also introduced loan classification after rating agencies called for tougher regulations. Non-performing loans climbed from 14 percent to 17 percent of total loans in 2000 and provisioning expenses rose 34 percent.

But banks started reviewing their strategy after Lebanon secured $4.4 billion in soft loan pledges from 18 countries and organizations in the “Paris II” conference of donors. Interest rates on T-bills and deposits for both Lebanese pounds and US dollars fell to an all-time low.

The Central Bank, which was seeking to ease the debt burden on the government, cut interest rates from 14.4 percent to almost 9 percent on T-bills. This allowed the government to reduce debt servicing by $400 million a year. With assets of more than $58 billion, Lebanese banks will have to figure out a way to maintain the profits amid signs that T-bills may not remain the source of income.

According to unofficial studies, nearly 60 percent of the banks’ assets are in the form of T-bills and Eurobonds. This means that 60 percent of the banks’ revenues come from these papers. Economists stressed that the banks should change their strategy because the government cannot afford to finance the public debt in this manner. They also highlighted the need to focus on stimulating the economy.

Former Finance Minister George Corm has repeatedly said that banks should give more loans to the private sector. “The only way out of this situation is to achieve higher growth. Banks can play a big part in this strategy thanks to their large assets,” one economist said.

Interest rates on loans have already started to drop, but not to the levels the private sector was hoping for. “If banks want to help industrialists and merchants, then they should offer lower interest rates on loans,” one businessman said.

The other option that banks will be exploring in 2004 is expansion outside Lebanon. Several local banks have already obtained licenses to operate in Syria while others have opened branches in Jordan and Sudan. Byblos Bank chairman Francois Bassil said the Lebanese market was getting too small, adding that the time had come to look at other countries in the region.

Beirut 12-01-2004
Osama Habib
The Daily Star

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