Q: Do you think that Lebanese banks have managed to absorb the pressures from the United States to combat money laundering and terrorist funding? What actions have banks recently taken to tighten banking supervision and do you believe that the Lebanese-Canadian Bank experience will not be repeated again?
A: The banking sector in Lebanon enjoys a track record of compliance with all international rules and regulations, namely those pertaining to risk management, capital allocation, Know Your Customer, and combating money laundering and counterfinancing of terrorism. Moreover, respecting the supremacy of international resolutions has always been, and will always be a firm commitment of ours.
We Lebanese bankers, together with the Lebanese banking regulatory and supervisory authorities, prioritize the issue of meeting such standards, namely those of the Basel Committee on Banking Supervision and the Financial Action Task Force, and spare no effort to keep Beirut an eminent financial center in the Middle East, with a strong role in the region and the world.
Historically one of the oldest banking systems in the region, the Lebanese banking sector has developed to become one of the most sophisticated in the area. Like any other banking sector in the world, the Lebanese banking sector may face potential exposure to illicit activities, which must be prevented from infiltrating the banking system. Hence, no banking system is totally immune.
Money-laundering cases arise in numerous large international banks, but fortunately, those cases are considered to be the exception, rather than the rule.
A far as the action taken against the Lebanese Canadian Bank by the U.S. Treasury, many U.S. officials declared that such action did not target the Lebanese banking sector, but was instead “part of the U.S. Treasury’s global effort to protect the U.S. financial sector from illicit activities.”
Q: What was the impression you got from your visits to the U.S. and some European countries about the performance of the Lebanese banks? Do these countries ask for new measures to protect the banking system?
A: The main purpose of our visit to the U.S. was to further develop Lebanese U.S. banking relations, especially with our U.S. correspondent banks in New York, and to promote the Lebanese banking sector as the backbone of the national economy and a pillar of political and social stability in Lebanon and the region.
To this end, we visited the main decision-makers and influence circles in New York and Washington, the U.S. Federal Reserve Bank, the Treasury, the State Department, Congress and the American Task Force for Lebanon.
[While] chairman of the Association of Banks in Lebanon, I always considered, that the Association’s first priority was to ensure compliance of our banks with international rules and regulations, and to weave connections with high-ranking officials and influential decision-makers in the world, in view of spreading the efforts undertaken by our Lebanese banking sector in this direction.
All parties visited in the U.S., Europe and other countries of the world expressed their satisfaction regarding Lebanon’s strong commitment to international standards and regulations amid rising domestic and regional tensions.
Q: The political and economic problems have caused most economic indicators to drop. How did the Lebanese banks manage to contain these negative indicators and were they compelled to increase provisions on nonperforming loans?
A: The ramifications of the Arab Countries in Transition have hindered economic activity in Lebanon, and reflected negatively on the profitability of most sectors.
The banking sector, however, demonstrated resilience to exogenous shocks, with banks posting relatively robust year-on-year growth rates in their consolidated balance sheet, loan portfolios, customer deposits and profitability. It is worth noting, however, that the contribution of the foreign operations of Lebanese banks represents a mere 15 percent of the sector’s consolidated profits. One cannot deny that the profitability of Lebanese banks having a presence in turbulent markets like Egypt and Syria, for instance, was hampered by the ramifications of the Arab Countries in Transition. Nevertheless, Lebanese banks have adopted corrective measures on time, including full provisioning of their doubtful and non-performing loans portfolios and more conservative lending in the concerned countries whose results had already been reflected in their 2011 and 2012 financial statements.
Q: Can you shed some light on the growth in profits, deposits and assets of the Lebanese banks in the first six months and what is your projection of growth end of this year?
A: The consolidated balance sheet of commercial banks operating in Lebanon widened by 8.11 percent year-on-year to LL236.096 trillion ($156.61 billion) during the month of May 2013, up from LL218.375 trillion in May 2012. Concurrently, customer deposits rose by 9.82 percent on an annual basis to LL200.309 trillion, compared to LL182,390 trillion as at end of May 2012. On the lending front, loans to the private sector came in 7.24 percent higher on a yearly basis at LL66.962 trillion, in comparison with LL62.443 trillion a year earlier. On the profitability front, Lebanese banks have recorded a 5.88 percent year-on year increase in their consolidated net profits to around $513 million as at end of April 2013, up from $484 million in the same period in 2012. We are confident that the banking sector will manage to sustain these aforementioned growth rates during the full year 2013, thanks to the confidence of the local and international community in this vital economic sector, added the robust inflow of remittances from the Lebanese diaspora and the financial engineering schemes promulgated by the Central Bank to counter economic shocks and stimulate lending.
Q: Lebanon’s GDP growth may shrink to less than 1 percent this year according to some economists from some international organizations. If these projections are true, how can Lebanese banks be able to sustain growth this year?
A: The rising local and regional political tensions have weakened the Lebanese macroeconomic environment, prompting many international organizations to downwardly revise the country’s economic growth estimates. In figures, the IMF projects real GDP growth to slow to 2 percent in 2013, while the IIF, in its June 2013 “Global Economic Monitor,” foresees Lebanon’s real GDP growth to slow to around 0.8 percent for the same year.
Nevertheless, and notwithstanding the sluggish economic growth prospects, the Lebanese banking sector has managed to record a healthy year-on-year growth in its consolidated balance sheet (8.11 percent growth) in the first five months of 2013, a figure which is sustainable for the rest of the year.
In fact, the Lebanese banking sector is armed with ample liquidity levels, a strong capitalization, and a stringent regulatory framework, which altogether continue to shield the industry from the negative repercussions of the local and regional turmoil. Banks are also keen on continuously engineering new fee-generating products and services that respond to the ever-changing needs of the community by exploiting the excess liquidity in the sector. This includes a special focus on small- and medium-size enterprises, a family of retail products, and subsidized loans that address the Central Bank’s latest initiative under whose provisions it extended banks with low-interest credit facilities to finance the productive sectors of the economy.
Q: Are Lebanese banks still able to meet the conditions of Basel III although the ceiling for the capital adequacy ratio will reach 8 percent at the end of 2014? Do you believe medium and small sized banks will succeed in meeting these recommendations, and if they don’t what is their option?
A: Lebanon, along with China, were among the pioneering countries around the world to start implementing the Basel III pillars. In fact, and on Dec. 7, 2011, the Lebanese Central Bank issued Intermediate Circular Number 282 in which it set a more aggressive timeline for Lebanese lenders to implement Basel III requirements than that set by the international Basel committee. As a result, the Lebanese banking sector is currently in line with the requirements of the Basel committee and the more stringent ones imposed by the Lebanese Central Bank.
In figures, latest statistics reveal that the Lebanese banking sector’s capital adequacy ratio currently stands at 11.76 percent, in comparison with the 10.5 percent ratio required by the Basel committee by year-end 2014 and the 11.50 percent ratio required by the Lebanese Central Bank by end of next year. Lebanese banks have so far succeeded in passing said requirements with flying colors by undergoing sequential capital increases and adhering to the Central Bank’s prudent directives, mainly through the recapitalization of at least 75 percent of their annual profits since the year 2011.
In this perspective, we don’t see medium- and small-sized banks falling behind the prudential ratios of capital adequacy, with some resorting to issuing a series of perpetual preferred shares as a tool to boost their Tier 1 capital.
Q: We all realize that Lebanese banks are financing the needs of the state and are still replacing maturing bonds. But aren’t you concerned about the rise of the public debt by $5 billion during the term of Prime Minister Najib Mikati?
A: Amid such turbulent times, the Lebanese government has been resorting to rolling-over its maturing debt at a cheaper cost, the thing which has translated into an 8 percent year-on-year drop in debt service during the first quarter of 2013. The government, however, has always been keen on honoring its debt commitments and has never defaulted on its debt obligations, the thing which dampens our worries and those of the international community with regards to the increasing debt stock. It is imperative, however, for the government to start taming the debt burden through targeting lower budget deficits in the upcoming budget laws. This can be achieved by proceeding with the progress made in the oil and gas sector to what it can generate in revenues, maintain the progress made on the electricity reform plan front (since the electricity sector is currently draining public finances), and aiming at a wider implementation of the Public-Private Partnerships concept.
It is worth noting, in this perspective, that Lebanese banks’ share of local-currency-denominated debt continues to pile up, outweighing other lending counterparties, with the banking sector controlling a stake of 50.6 percent of total Lebanese pound-denominated debt as at end of April 2013, with the share of the nonbanking sector standing at 18 percent.
