Lebanese Banking - Depositors seek sanctuary in a well managed and robustly insulated banking sector

Published in The Wall Street Journal - Special Lebanese Supplememt -

By Scherzando Karasu

The crisis that swept the international banking system last September and October, prompted by the collapse of Lehman Brothers and widespread fears about bank stability, led to a global crisis of confidence that has tipped much of the developed world into recession.

With a banking system that is of disproportionate importance to the economy – the sector accounts for some 65% of the Beirut stock market, while deposits in the 65 commercial banks stand at around $94 billion, or 330% of GDP – the mood in Lebanon should have been anxious.

Instead, the sector saw almost unprecedented inflows, raising commercial deposits some 16% over 2008.Much of this was in the latter part of the year as anxious depositors – not just Lebanese, but Arabs from the Gulf and wealthy Russians, among others – moved funds out of foreign banks weighed down

by toxic assets toward what they perceived as a safe haven of well managed and robustly regulated banks. The flows have continued, with some $2 billion coming in during the first quarter of 2009, while dollarization in the economy has declined almost 10% over the past year to 69%, reflecting growing confidence in the Lebanese pound.

“There’s a lot of money coming from the region because the region identifies culturally with the Lebanese and they have developed a certain confidence in the system. It’s not a hard sell,” says Tarek Joseph Khalifé, Chairman and General Manager of CreditBank, the country’s 15th largest, adding that Lebanese banks are renowned for their conservatism.

Riad Salamé,Governor of the Banque du Liban, the country’s central bank, is widely credited with being the steady hand on the tiller, and the architect of the cautious approach to financial regulation that has driven the sector’s success. He drafted policies that largely immunized Lebanese banks from the global contagion. “Lebanon will not feel the effects of the financial crisis, because we took the necessary measures preemptively,” the Governor says.

As well as ruling out toxic assets like sub-prime paper, the central bank regulated structured products and prevented the banks from leveraging their balance sheets. The result was a combined profit for the sector of over $1 billion in 2008, in marked contrast to traditional banking centers. The high liquidity in the system, he suggests, will prevent any crisis in 2009. This stern supervision, coupled with the traditional approach favored by Lebanese bankers, has served as a magnet for depositors.

“Here, we still have this very old-fashioned relationship between customers and bankers. We don’t have depositors who don’t know their bankers, and there is a loyalty that comes from those personal relationships,” says Finance Minister Dr. Mohamad

Chatah. “So, it’s a very advanced sector, a $94-billion banking sector with many branches, yet the relationships are very personal. There is the perception of depositors that their banks are well-run, but also the objective fact that the banks are protected by very high standards, conservative standards.” CreditBank, among the top-eight commercial lenders and trade financiers in Lebanon, is a case in point.

Mr. Khalife stresses that the bank grew organically, according to its own deposit base and adhering to traditional business and risk-management practices. This cautious approach enabled it, in 2002, to take over the local operation of Credit Lyonnais. It has since acquired a license to operate in Armenia (a country of similar size to Lebanon and with substantial cross-cultural ties), its first foray abroad.

In 2009, it is working to develop a strategic partnership with a Gulf-based financial group to boost its growth across the region. “We’ve been able to grow because we’ve focused our balance sheet on what we do best, what we understand, which is managing risk, servicing clients and growing a relationship with private enterprise,” Mr. Khalifé says. Cautious management has enabled other banks to make the most of Lebanon’s record recent growth.

One example is BankMed, established just after independence in 1944, but revitalized since 2005 under Chairman and General Manager Mohammed Hariri and a hand-picked team of seasoned banking professionals. The bank was rebranded – Mr.Hariri notes that even he had trouble spelling Banque de la Méditerranée – established a firm foothold in the retail market, and regained its position among the country’s top-five banks with 50 branches and a growing presence across Lebanon. Profits grew from $3 million in 2006 to $40 million in 2007 and a remarkable $75 million to September last

year. In cooperation with the wider family group of which it is part, BankMed has activities in Saudi Arabia, Cyprus, Turkey and Switzerland. BankMed’s strategy this year, Mr.Hariri says, will be to watch and wait.“With the current financial crisis, I think the idea for this year is to lay low and see what happens; who is going to stay in the market.”

In any expansion abroad, he says, it will look to leverage its relationship within the group. So what does the future hold for the sector, especially given the global uncertainty? Consolidation among Lebanon’s commercial banks is expected – some, Finance Minister Dr. Chatah among them – say it would be desirable, especially given that legislation has already been agreed with the central bank. With the high foreign-currency liquidity that is an abiding characteristic of Lebanese banking, five or six large, strong banks could be even better positioned to take advantage of opportunities at home and help drive Lebanese businesses abroad.

However, Makram Sader, Secretary General of the Association of Banks in Lebanon, preaches caution, given the prevailing global uncertainty and the reputation for vigilance that has underpinned Beirut’s re-emergence as a credible banking center.“Crisis is caused by easy credit, so our bankers should proceed carefully, ”he says.“They should keep their liquidity until [there is] financial stabilization, both regionally and internationally.”

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