Banks struggle to maintain high profits

Lebanese lenders saw moderate growth in the first four months of 2013.

BEIRUT: Lower GDP growth, falling interest rates on Lebanese sovereign bonds and stricter Basel III measures could affect the profitability of Lebanese banks in 2014 and 2015, bankers said Wednesday. “The results made by Lebanese banks in the first quarter of this year are very positive and in a way reflect the stability and resilience of this sector. But I am not sure the banks would be able to maintain the same rate of growth in profits if the GDP growth remained low and yields on government Treasury bills fell,” Roger Dagher, the Chief Financial Officer of Bank of Beirut, told The Daily Star.

During the first four months of 2013, Lebanon’s banking sector saw the same growth pattern in its activity, which remained more or less moderate within the context of relatively tough operating conditions locally as well as regionally.

Banking sector activity progressed by 2.1 percent in the first four months of 2013, moving from $151.9 billion at end-December 2012 to $ 155.1 billion at end-April 2013, as per Central Bank data.

“I believe the 2.1 percent growth in the first quarter of this year could end up with a growth of 10 percent at the end of this year,” Dagher argued.

He added that this positive projection could only change if serious security incidents occurred this year.

However, the banker warned that the Lebanese banks may experience some pressure in 2015 when the minimum required capital adequacy ratio reaches eight percent.

“Currently, none of the Lebanese banks and especially the large ones have problems in meeting the requirements of Basel III. No one has changed the structure of the balance sheets in 2012 and 2013,” Dagher said.

“When I reach a common equity of 8 percent, then I have two choices. Either I get a common equity by raising the capital or make the payout dividends small or I work in risk weighted assets, and this means instead of buying Lebanese sovereign Eurobonds, which carry a risk weight of 100 percent, I go to higher rated banks abroad and have risk weight of 20 percent,” the banker said.

In simpler terms, Lebanese banks may face the hard choice of buying foreign bonds which carry lower risk but lower return on equity instead of buying Lebanese bonds which carry higher risk but higher return on equity.

Rating agency Moody’s revised the outlook of the three leading banks in Lebanon from stable to negative due to their higher exposure to the public debt in the country.

Lebanese banks hold a big chunk of the T-bills and Eurobonds and this makes the lenders more vulnerable to any possible government default in the future although some economists seem quite confident Lebanon will always meets its dues even under difficult circumstances.

Joe Sarrouh, the adviser to the chairman of Fransabank, stressed that Lebanese banks could still maintain steady growth in profits and deposits in the future if the GDP growth reaches acceptable levels.

He added that the economic and political environment usually reflects on the profitability of Lebanese banks.

“The driver for business and expansion is growth. You can’t go to a place if there is no growth. The biggest challenge facing business in Lebanon is growth and not regulation,” he said.

He added that if a business and a bank operated in a stagnated economy and the cost base remained the same then definitely profits would shrink.

Sarrouh insisted that Lebanese banks, especially the large ones, would not have a problem complying with the Basel III requirements.

But some bankers who spoke on condition of anonymity fear some of the small banks may not be able to meet the conditions of Basel III in the future.

They added that some of the small banks do not have the financial means and human resources to make additions investments in risk management or able to increase the capital.

“One of the options some of these small banks will face is whether they should sell their assets to larger banks instead of going under,” one banker said.

A version of this article appeared in the print edition of The Daily Star on June 06, 2013, on page 5.




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