December 12, 2012 11:34 pm

Lebanon: Temporary shock on volatile faultlines has turned into trend

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments
Women cross the busy Hamra street in Beirut©Reuters

Hamra Street: business in Lebanon itself is 'healthy'

Lebanese banks’ once soaring profit growth has plunged as the sluggish domestic economy and spillover from the crisis in Syria next door take their toll.

In the first six months of 2010, the year-on-year profit growth for Lebanon’s top 12 banks was 27 per cent. In the same period of 2011, it was 7 per cent and this year it was 8 per cent.

In the sector as a whole, profit growth was just 2 per cent in the first nine months of 2012. What some had hoped was a temporary shock is emerging as a trend.

Different analysts in the sector, whose combined deposits total nearly $150bn, emphasise different causes. For Fadi Osseiran, general manager at Blominvest Bank, it is turmoil-racked regional markets that have been eating away at profits.

Riad Salameh, the central bank governor, told Reuters last month that Lebanese banks’ exposure to Syria alone had cost them $400m. The banks’ business in Lebanon itself is “healthy”, Mr Oseiran insists, in spite of the slowdown. “What we have seen is not a slowdown in every area,” he says. “We are not upbeat – there is no buzz of course – but activity is still going on.”

By contrast, Nassib Ghobril, chief economist at Byblos, argues that it is the Lebanese economy that is most affecting prospects. “We are Lebanese banks – we are not international and we are not regional. Most of our revenues are in Lebanon,” he says. “Whatever happens in Lebanon has the most impact on revenues and profitability.”

Credit rating agency Moody’s estimates that real growth in gross domestic product will be about 2 per cent in 2012 and 2.5 per cent in 2013, contrasting these figures with an average annual growth rate of 8.1 per cent between 2007 and 2010.

This pattern is of course impossible to dissociate from the turmoil in Syria, which has contributed to an increasingly unstable environment in Lebanon itself.

But neither has the situation been helped by the politically paralysed government which has failed to either stimulate growth or address the worrying government deficit.

“Local businesses are in wait and see mode. There hasn’t been a major FDI project since early 2011 – all this accumulates to reduce domestic lending opportunities,” says Mr Ghobril.

It would take a shock on the same level of magnitude as the Doha accord (brokered when opposing factions nearly brought the country to civil war in 2008) to reverse these trends, Mr Ghobril argues.

In another part of the world, such an outlook would be depressing. In Lebanon, however, a small country of few natural resources perched on the region’s most volatile political faultlines, bankers are more inclined to emphasise how much worse it could be.

Years of insistence on high liquidity buffers and cautious lending, much of it to the government, have served the sector well for times such as these.

Nonetheless, the latest assessment by Moody’s in October continues to rank the outlook for the sector as negative. Incorporating both explanations for the sluggish profit growth, the agency predicts 18 months of weakened profitability due to higher provisioning needs in countries such as Syria, lower business volume and reduced fee generation.

Nadim Kabbara, head of research at FFA private bank, says that, while pressure on their margins is a concern, the banks will probably withstand difficult times. He emphasises, however, that they need to find sources of new growth and profitability in the long term. “The banks have had a strategy of diversifying their income … [it] has not played the way they would have liked,” he says.

“I think now it’s up to them to decide how they can make up for the shortfall in profitability and where they can find growth.”

One option that has been talked about is pushing into more unusual foreign markets, such as Iraq and Libya.

Historically, Lebanese banks have not been bold enough in these ventures, Mr Kabbara says. A decision by Banque Audi last year to establish a subsidiary in Turkey with $300m of share capital could provide a more interesting model, however. Marwan Barakat, head of research at Banque Audi, says the project has seen “very significant” growth in the first few months of operations.

“Audi is taking that wager,” says Mr Kabbara. “The opportunity is clearly there, but it’s very competitive.”

Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.

  • Share
  • Print
  • Clip
  • Gift Article
  • Comments
SHARE THIS QUOTE