The bank’s Lebanese exposure is through its subsidiary Emirates Lebanon Bank. Image Credit:

Dubai: Bank of Sharjah has reported preliminary profits in its UAE operations, but remains in consolidated net loss because of a political stalemate, currency instability and a new accounting rule applied to its Lebanese subsidiary Emirates Lebanon Bank (EL Bank), Varouj Nerguizian, Group CEO of Bank of Sharjah, told Gulf News in an interview.

The bank’s Lebanese exposure is through its subsidiary Emirates Lebanon Bank. A very weak Lebanese operating environment, the sovereign debt default in March 2020 and new accounting requirements have added to the lender’s woes.

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“Our problems in Lebanon are largely technical and are linked to political instability in the country and totally unreasonable and illogical provisioning requirements imposed under IAS 29 (International Accounting Standards 29) with mandatory factoring of the impact of hyperinflation on valuation of our assets,” said Nerguizian.

EL Bank’s asset base in Lebanon is largely constituted of cash and placements at Bank du Liban (BdL, Lebanon’s central bank) at about 60 per cent, and the remaining is corporate lending. As it stands, the duration of BdL’s freeze of Lebanese banks’ foreign currency assets remains uncertain, given that they are being used to finance the country’s import requirements.

Nerguizian believes Lebanon’s banking sector crisis can be solved only by a stable government that can take some hard decisions on the economy and the currency.

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Varouj Nerguizian, Group CEO of Bank of Sharjah

Crisis of confidence

“Lebanon is not a poor country. It has huge natural gas reserves. A concrete plan to monetise these assets along with the floatation of the currency can immediately change the course of the banking sector and the economy,” he said.

The prevalence of the dual exchange rate on the Lebanese pound, stringent restrictions on the withdrawal of deposits and the conversion of dollar deposits to local currency at official exchange rates (that are significantly lower than parallel market rates) have eroded investor confidence in the Lebanese economy and the banking system.

The official exchange rate is still 1,507 to the dollar, while the currency is changing hands in the parallel market in the range of 22,000 to 23,000.

Nerguizian believes that a monetary policy decision similar to that of Egypt could largely address Lebanon’s financial woes. Earlier this month, Egypt had devalued its currency by more than 16 per cent and raised interests by 1 per cent, paving the way for higher foreign investment.

“Floating of the Lebanese pound will automatically unify exchange rates and a one-time revaluation of assets. It will bring in substantial foreign investments, brighten the possibility of an IMF-led restructuring and funding of government debt and see a spurt in deposits by Lebanese expatriates,” said Nerguizian.

Strong recovery in UAE

The standalone performance of the UAE operations of Bank of Sharjah has been profitable in 2021.

Broad-based economic recovery in the UAE has helped the bank make significant gains on its investment portfolio consisting both of real estate and equity portfolios.

“Some of our real estate and equity portfolios that suffered valuation losses following the COVID crisis are now making significant gains on marked-to-market valuations,” said Nerguizian.

Fund-raising needs

The extraordinary provisioning requirements have resulted in BOS’s capital ratios declining significantly in recent years. A combination of low internal capital generation and regulatory changes have seen the capital adequacy ratio slipping to 11 per cent, slightly above the minimum regulatory requirement of 10.5 per cent under the Basel 3 rules.

“The board and the management are fully aware of the need to increase our capital and it will be done through an AT1 (additional tier 1 are bonds or a type of perpetual debt instrument that banks use to augment their core equity base and thus comply with Basel III norms) or a share sale to our existing shareholders. The modalities are being worked out,” said Nerguizian.

BOS’s funding profile and liquidity remains healthy and a concentrated customer deposit base provides the bulk of funding at the bank. BOS complements its deposit funding with senior unsecured debt issues.

What are IAS 29 hyperinflation provisions?

The ‘IAS 29 Financial Reporting in Hyperinflationary Economies’ requires the financial statements of any entity operating in a country with hyperinflation to report its accounts in the functional currency of that country reflecting the actual purchasing power.

The standard lists factors that indicate an economy is hyperinflationary. One of the indicators of hyperinflation is if cumulative inflation over a three-year period approaches or is in excess of 100 per cent.

A potential IMF deal raises hopes

A delegation from the International Monetary Fund will start talks in Lebanon on March 29, Prime Minister Najib Mikati said on Saturday in Doha.

The IMF-led bailout and debt restructuring is the only option before the country to pull its financial system and economy out of the current crisis. The Lebanese pound has lost more than 90 per cent of its value since 2019, when the financial system collapsed, plunging the majority of Lebanese into poverty.

The massive government debt pile (more than 150 per cent of GDP) needs to be addressed immediately to unlock banks’ foreign currency assets to make the banking system viable.