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French Version

Business 2004: Lebanon's banks going strong - and bullish about 2005 (Daily Star)

There is no doubt in anyone's mind that banks in Lebanon are probably one of few successful sectors in the country.
With assets of more than $62 billion, Lebanese commercial banks wield enough power to influence the quality of life in a country suffering from a high unemployment rate.

According to studies, Lebanese banks' assets equalled 340 percent of the country's gross domestic product (GDP) at the end of September 2004. In most Arab countries, bank assets only equal 90 percent of GDP, while the emerging market average was 107 percent, and that of advanced economies at around 132 percent, according to Banque Audi.

Banks prospered after the end of the war as customers' deposits climbed to more than $55 billion in less than 10 years. Some leading banks recorded net profits as high as $70 million to $80 million a year.

However, outsiders may ask why these banks attracted so many deposits while average Lebanese citizens complain about low wages and the high cost of living. The secret lies in the interest rates.

The average yield on dollar deposits is now 3.5 percent, while Lebanese pound-denominated deposits are at almost 6.50 percent. These rates used to be much higher before 2001, when Lebanon managed to secure $2.5 billion in soft loans from France, Saudi Arabia and other countries to help the government reduce the cost of debt servicing.

Despite concerted efforts to diversify income, at least 70 percent of the banks' revenues still come from interest rates.

Local banks are also sitting on large quantities of government treasury bills and eurobonds, which carry very attractive yields to investors and clients seeking to earn a good return on their equity with minimum risk.

Local banks, which hold more than 70 percent of the government's debt bonds, have been financing the country's $35 billion public debt since 1994.

Critics say the government is depriving the private sector of badly needed loans as banks continue to provide credit facilities to the state at very high interest rates.

Banque Audi said in its third quarter report that in terms of public sector lending, the first nine months of 2004 saw a growth of 6.7 percent against a 13.6 percent drop during the same period last year.

As for the Lebanese pound, despite the resumption of T-bill auctions on the primary market (in November 2003), banks' holdings of T-bills fell by LL73 billion ($43 million) in the first nine months to reach LL11.293 trillion at the end of September. This reflected weak new subscriptions in Lebanese pound-denominated debt instruments against a surge in FX-denominated paper within the context of a rise in deposit dollarization.

The banking sector's foreign currency exposure to the state increased in the first nine months of 2004, with the issuance of foreign currency eurobonds, after two years of non-renewal of maturing issues. The sovereign eurobond portfolio held by the banking sector rose from $6.364 billion at end-December 2003 to $7.347 billion at end-September 2004, a rise equivalent to $983 million. As a percentage of foreign currency deposits, foreign currency sovereign exposure increased from 19.8 percent in December 2003 to 20.6 percent in September 2004, but remains much lower than the 23 percent peak reached at end-2002.

The government tapped the market again with another $1.375 billion issue of eurobonds in October this year and as usual Lebanese banks snapped up most of the new issues.

"Lending to the government is the easiest way to make money," one economist said, adding that this trend should change in the future because banks are increasing their risk exposure.

However, most bankers brush off these comments, mentioning that the private sector benefited greatly from these loans, especially after the Paris II conference. Total credits to the private sector rose by 3.8 percent in the first nine months, reflecting a clear pick-up in lending against a net contraction of 0.7 percent in the same period in 2003. Lending activity growth can be mainly attributed to the noted improvement in economic activity, which gave rise to an enhanced demand for credit on behalf of the private sector as well as a change in banks' lending policies.

To encourage the private sector to obtain easy credit facilities after the success of Paris II, the Central Bank urged local banks to lower rates on dollar and Lebanese pound loans.

Interest rates on credit to the private sector did fall significantly, but not as far as industrialists and small and medium entrepreneurs expected.

Despite the steady profits over the past few years, banks are under increasing pressure to find new markets outside Lebanon.

The Lebanese market is getting smaller, with more than 60 banks vying for a bigger slice of the cake.

The 10 leading banks in the country control more than 70 percent of the local market share - and this means that the rest of the banks can barely scrape a profit. The situation may even get worse for some small- and medium-size banks once Lebanon adopts the strict requirements of Basel II agreement, in either 2006 or 2007.

Basel II requires banks to allocate more funds for the improvement of risk management.

Banque Audi, BLOM and Byblos Bank have already started implementing their expansion strategy and have opened new branches in Syria, Jordan and Sudan. Lebanese banks have put Lebanon's name on the map of countries with efficient banking sectors. However, they will face new challenges in the future as the rules of the game change, as globalization imposes itself on the Middle East.

Osama Habib is senior business writer for The Daily Star

Beirut 10-01-2005
Osama Habib
The Daily Star

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