Globe-trotting Lebanese lenders face toughest test at home

LONDON: Lebanon’s economic crisis is a litmus test for the resilience and domestic support of its banks as well as their potential for sparking contagion abroad.

Lebanese lenders remained closed for a seventh working day on Friday, with the heavily indebted country paralysed as hundreds of thousands of people protest over economic strife, leaving schools and businesses shut.

The government has responded by promising reforms which involve banks stumping up 5.1 trillion Lebanese pounds (Dh12.42 billion, $3.4 billion) towards deficit reduction in next year’s budget, partly through a rise in tax on their profits.

“These measures should weaken the banking sector as they will cut into their profit margins over the next year,” said Natasha Smirnova, portfolio manager at PineBridge Investments, pointing out the levy was just a one off for next year.

Financial services make up 8 per cent of gross domestic product in the country of 6 million. Bank deposits to GDP stand at 243 per cent, the third highest ratio globally after Luxembourg and Hong Kong.

“Banks have an enormous role in government funding, as they are almost their only source of financing, and the cabinet/ central bank will proceed with utmost caution so they do not hurt the sector too much,” Smirnova added.

Lebanon’s unorthodox “financial engineering” relies on them drawing in forex deposits from abroad by offering high interest rates to help shore up the country’s pressurised forex reserves.

Lebanon has 66 registered lenders, with commercial banks holding just over $260 billion of assets, central bank data showed, though a handful of large players dominate.

But while banks in Lebanon have an unusually wide geographic spread due to its estimated diaspora of around 14 million, their closure so far appears to pose relatively little threat to wider financial stability.

The Lebanese have a long history of emigration and settling around the world, with large expatriate populations in Brazil and the US in addition to Shiite communities in Africa.

“Lebanese banks have significant operations in the region, but this is mainly through a subsidiary model, where those operations are ring-fenced,” said Farouk Soussa, senior economist with Goldman Sachs. “This minimises the risk of financial contagion either way.”

Bank Audi — Lebanon’s biggest bank by assets — operates in 11 countries including Saudi Arabia, Egypt, France and Switzerland. Its annual report showed that of its total assets of $47.2 billion, nearly 70 per cent came from Lebanon at the end of 2018 compared to just over 60 per cent the previous year.

Its Turkish arm Bank Odea, in which Bank Audi holds a 75 per cent stake, accounted for nearly 13 per cent of assets while Egypt accounted for 8.2 per cent. However, the share of both countries in total assets had declined due to currency depreciation. “Bank Audi’s branches and subsidiaries abroad are stand alone entities and are therefore not affected by the crisis Lebanon is currently witnessing,” it said on Friday in response to questions from Reuters.

Blom Bank operates in around 10 countries including Britain and Romania. But of the bank’s $36.7 billion of assets at the end of 2018, nearly 83 per cent came from Lebanon, with another 9 per cent from MENA, including Egypt, Jordan and Iraq.

Asked what effect the crisis in Lebanon was having on its branches and subsidiaries abroad, Blom Bank said it had “witnessed an increase in its foreign operations”, without giving any further details.

Bank of Beirut in 2011 bought Australia’s Bank of Sydney, which offers mortgages, home loans and savings accounts and states on its website that deposits were covered by the Australian Government Deposit Guarantee.

Salim Sfeir, chairman of Bank of Beirut and the Association of Banks in Lebanon said he expected banking operations will fully resume once banks reopened. Bank Audi said it was servicing and replenishing ATMs, collecting cheques deposited at smart ATMs and “processing emergency requests”.

Whenever, wherever

Many of Lebanon’s lenders focus on banking expatriates rather than being systematically entangled in the financial ecosystems of other nations.

The other factor limiting the potential repercussions of the stresses in the Lebanese banking system is that many western banks have limited exposure to the country, which was shattered by civil war between 1975 and 1990. It now faces sluggish growth and high unemployment.

“It might make you think of Ireland where banking sector stress will completely bring down the whole economy,” said Nafez Zouk at Oxford Economics. “But Lebanon’s banking sector is pretty plain vanilla — it is not risky, there is lot of macro-prudential regulation ... it’s very, very pure and simple banking.”

Of the major western banks, Citigroup remains one of the few with a presence, with 35 staff offering corporate and investment banking as well as trade finance, the US bank’s website shows.

JPMorgan has just a handful of people based in Lebanon, who work in Treasury Services, which is part of wholesale payments.

Others have withdrawn altogether.

HSBC sold its Lebanon subsidiary to Blom Bank some two years ago, while banks from other Arab countries have also dialled down their activities.

“The situation in Lebanon is idiosyncratic and unlikely to have any contagion on emerging markets as we have seen historically with political developments there,” PineBridge’s Smirnova said.