BEIRUT: Lebanese banks may have successfully weathered the Arab uprising storm and overcome the weakness in the domestic market, but their success has done little to attract investors. “To me, Lebanese banks offer very good value, but liquidity on the Beirut Stock Exchange is low, and investors don’t like that in case they want to get out quickly,” said Elena Sanchez-Cabezudo, CFA, MENA banks analyst at EFG Hermes in an interview with The Daily Star.

Indeed, recent trading activity on the tiny Mediterranean exchange has been dismal even by downturn standards after investors slashed their trading by over two-thirds to 326,779 shares during the week ending October 14.

Despite weak trading, Beirut stocks mounted their biggest comeback in three months with the Beirut Stock Index (BSI) advancing 0.88 percent during the week and closing at 1,220.54 points on Friday to bring the market capitalization slightly up to $10.52 billion. The rebound marked the latest attempt by stocks to regain some of the lost grounds during their worst year-to-date performance in a decade.

Solidere, Beirut Stock Exchange’s heavyweight stock, saw its class A and B shares inch up 1.08 percent and 0.95 percent respectively, but it was Bank Audi, the country’s top lender by assets, which led the market with a 3.64 percent gain to close at $5.98, while BLOM and Byblos held their grounds at $7.8 and $1.63 respectively. Lebanese bank networks in crisis-stricken countries such as Egypt and Syria had sparked investor fears of rising provisions over the past nine months.

However, Sanchez-Cabezudo said Lebanese banking operations in Egypt have been resilient to the uprising, attributing the decline in stock prices to heightened MENA risk-aversion. “In Egypt, operational performance of Lebanese banks during the first half was resilient despite higher provisions, so, overall, they have been very resilient to the Arab Spring environment and to weak growth in the domestic market. I think risk aversion for the MENA region as whole is behind the decline in equity prices,” said the EFG Hermes equity analyst.

Although Lebanon’s banks were not exposed to the credit crises faced by their UAE peers, their shares have suffered more, creating an attractive entry point for value investors. “Current market prices of banks do not reflect fundamentals. They were already undervalued even before the recent crisis began,” said Sanchez-Cabezudo who has “BUY” ratings on Bank Audi and BLOM Bank with price targets of $8.61 and $10.7 respectively.

Still, the pillars of the Lebanese economy were not fully immune to the domestic political turbulence. Private sector deposits at the country’s commercial banks rose only 9.96 percent year-over-year to $113 billion in August, their slowest pace since November 2007, and inched up 5.4 percent in the first eight months compared to a 7.3 percent rise during the same period in 2010.

On the bright side and in the absence of stock price gratification, investors can still bet on the generosity of Lebanese banks in distributing dividends, but should expect little sympathy in return for falling prices. Sanchez-Cabezudo said she did not expect banks to raise their dividends to lure in investors, arguing that “[they] will probably maintain their dividend policies as they are not managed only based on the short-term,” and recommending that “banks preserve capital to take advantage of a potential improvement in growth when it comes, be it in early, mid, or end of 2012.”

But with Syrian unrest still earning a major share of domestic and regional political discourse, and at the doorsteps of third quarter earnings, Beirut stocks appear poised for an extension of the passive status quo, despite depressed valuations, in the wait for a catalyst which is ironically, according to Sanchez-Cabezudo, “some stability in Egypt and a resolution to the crisis in Syria.”