Bank of Sharjah retains hope of an eventual Lebanon economy rebound helping its ELBank

Dubai: Some problems are way too difficult to shake off. Just ask Bank of Sharjah’s Varouj Nerguizian, Group CEO.

The bank has been riding the same growth dynamics that other UAE banks have recorded in their numbers this year -- top-line and bottom-line gains brought on from higher interest income, a bustling business landscape in the country, and sustained demand from individual customers.

In the first six months, Bank of Sharjah’s net profit from UAE operations was Dh104.4 million compared to the Dh9 million it came up with same period in 2021. As with other UAE banks, Bank of Sharjah, too, emerged from the shadow of the pandemic. The same was the case at the nine-month mark.

If the narrative ended there, Bank of Sharjah would be sitting pretty. The problem is it doesn’t, because of its stake in Emirates Lebanon Bank, which along with all other Lebanese financial institutions has been caught up in myriad problems dogging that economy.

The subsequent hit on Bank of Sharjah is substantial and has been the case for more than three years. At the nine-month stage this year, the bank’s net loss was at Dh282 million compared to a crippling Dh1.3 billion a year ago.

The net impairment loss on financial assets totalled Dh214 million from Dh87 million in nine-month 2021. These also reflect the accounting norms that have to be followed because of the hyperinflation stalking Lebanon. The problems at Emirates Lebanon Bank clearly will not be going away any time in the near future.

In an interview, Nerguizian offers a snapshot of what Bank of Sharjah has in mind in trying to resolve its presence in that troubled economy.

Your latest financials would still show gaping wounds from the Lebanon exposure. Is there any way you managed to bring down the extent of losses sustained?

First of all, it is important to emphasise that Lebanon is going through unprecedented times. When these standards were developed by accountants and regulators, the current state of the Lebanese economy was not foreseeable. Normally, in a country facing such challenges, the Central Bank and the Ministry of Finance would be the ones responsible for addressing the difficult financial situation. However, this has not been the case in Lebanon. Then, it is important to emphasise that the figures resulting from the application of IAS 29 and IAS 21 are neither gains nor losses, but accounting anomalies resulting from the textual application of standards with missing context. Accordingly, the figures will change regularly and in no way reflect the reality of Bank of Sharjah’s business situation.

With the adoption of a new value for the (Lebanese pound) peg in early November - 15,000 instead of 1,507 - the US dollar converted to 6.6 cents in our end-December 2021 balance-sheet would rise to 66.6 cents. A ten-fold improvement that reduces the accounting anomaly to only Dh547 million instead of Dh2.65 billion. Group equity stands at Dh3.2 billion without IAS 29 and IAS 21, at Dh1.41 billion with IAS 29 and IAS 21 and with the peg at 1,507, and at Dh2.65 billion with the peg at 15,000.
We have a very strong balance-sheet in Lebanon, ready to take off with the economy once normal life resumes.

In the near term, would you be called on to inject fresh capital into the Lebanon operations?

The equity of Emirates Lebanon Bank (ELBank) was protected with a CAR (Capital Adequacy Ratio) of 24 per cent. The BoS Group had previously complied with the mandatory 20 per cent increase. It is important to note that the context has nothing to do with the level of capital, but with liquidity. We are trying to mobilise some of the cash, estimated at $5 billion to $10 billion, that is not reaching the banking system and is kept in reserve by households. The reason for this is the lack of confidence in the banks. This is also part of the return to normalcy.

Are you thinking of any Plan B sort of option when it comes to that exposure? Any interest from anyone wanting to acquire a stake, at a steep cut?

Offers for an acquisition were always there but could not be materialised on time due to the illiquidity that hit the system, making a substantial sale difficult. The equity stands at $380 million. Today, no one would pay such an amount if confidence and normalcy are not restored.

We have protected our subsidiary from all these challenges so far, and it would not make sense anymore to sell it at a loss. We should take advantage of the expected return to normalcy. We enjoy a pristine reputation despite all the challenges.

If the Lebanon exposure was removed in full, how much has BoS grown?

The Bank of Sharjah UAE did very well - had it not been for the application of IAS 21.

In the likelihood that the current situation remains at the Lebanon operations, are there any short-term fixes for BoS?

The difficult situation will not last for ever. We believe that the signing of the maritime border agreement between Lebanon and Israel will usher in a new era of prosperity, as this is of paramount importance and a prelude for permanent peace process.

The gas is yet to be produced, but the prospect is huge. It would pave the way for the IMF and World Bank support, but in my opinion especially for very strong support from the US government in the form of long-term guarantees and foreign direct investment in the context of privatisation. One should not forget the much-needed support of the GCC countries.