Lebanon’s well-capitalised banks have postponed plans for regional growth, after the Arab awakening closed off the window for expansion opened by the global financial crisis.
The country’s banking sector is flush with cash but short of tempting opportunities now that formerly attractive markets such as Syria and Egypt are in political turmoil.
The move is a setback for Lebanese bankers, who had hoped to reclaim the position at the heart of the Arab world’s financial services industry that Gulf countries seized from them decades ago.
“Last year, regional expansion for all practical purposes was put on hold,” says Nassib Ghobril, the chief economist at Byblos Bank.
In late 2010, Lebanon’s big banks were seeking to move away from a reliance on holding government debt and plunge instead into regional markets. Buoyed by strong growth in the local economy and soaring deposit levels, one large bank was talking about having as much as 50 per cent of its assets overseas by 2015.
But as the Arab spring erupted, exposed institutions had to take significant provisions in Egypt and Syria – $45m in the case of Banque Audi, Lebanon’s largest bank.
The regional turmoil led the credit rating agency Moody’s to downgrade the sector’s outlook from stable to negative at the end of last year, as the big banks suffered falling profits growth.
The blow the Arab awakening delivered to the banks’ regional expansion strategy was particularly hard, given the relatively small size of the Lebanese market and their desire to tap overseas markets.
Lebanon’s neighbour Syria went into a dramatic economic decline as a result of the near-year long uprising against President Bashar al-Assad’s regime and the international sanctions that followed the bloody crackdown by his security forces. Egypt, once one of the region’s fastest-growing economies, faces an uncertain economic future as a fractious opposition and regressive military council vie for power.
Bankers play down the impact of the political upheaval, with Freddie Baz, the chief financial officer for Banque Audi, saying it has “not affected our overall risk profile”, and adding: “Our assets in Syria represent less than 3 per cent of our earnings.”
At the same time, representatives of all three of the big banks insist that overseas expansion remains the strategy in the medium term. “We still believe the right choice for Lebanese banks, the big ones, is to become regional banks,” says Fadi Osseiran, the general manager of Blom Bank’s investment arm, Blominvest.
But Ibrahim Saif, an economist at the Carnegie Middle East Centre in Beirut, fears the turmoil will just reinforce the sector’s conservative reflexes.
“Expansion was a very good option, but now that is limited they are coming inward and turning their back to previous attempts,” Mr Saif says, lamenting the fact that “at a time when there was relative stability there wasn’t a serious attempt to diversify the portfolio of lending”.
Decades of civil war, invasions and the past collapse of the currency have made Lebanon’s banking sector extremely cautious – and, its critics say, lazily reliant on lending to the government. Though private-sector lending has increased in recent years, the banks’ lending policies are cautious, and their liquidity buffers strong.
The present regional situation is unlikely to encourage any change to this model. Although Lebanon itself is going through a rare period of relative political stability, Syria has been crucial to the balance of power between its various factions that has prevailed since the end of its 1975-90 civil war. As the smuggling routes between the two countries hum with refugees and weapons, many fear Lebanon also will be affected.
According to Byblos Bank’s Mr Ghobril, this has resulted in the lowest consumer confidence levels since his bank began tracking them in 2007, slowing down an economy that is 80 per cent driven by consumer spending.
Pressure from the US not to do business with Syrian clients on the US or European Union sanctions lists has created an additional headache for the sector, with banks taking precautionary measures to avoid damaging their relationships with western banks.
The big banks may be able to weather all this, but with the local market crowded, and no end to the regional tumult in sight, there are question marks over how they will deliver the growth levels their shareholders have come to expect – and diversify away from their sovereign exposure.
“2012 looks more challenging than 2011,” admits Mr Ghobril.