Hard cash

Bank Audi, Lebanon’s largest bank, has had to weather its fair share of economic uncertainty. But it is planning to use what its ability to manage turmoil to drive its expansion abroad. Massoud A. Derhally reports.

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By  Massoud A. Derhally Published  July 10, 2005

Hard cash |~|BANK-200.jpg|~|WORKING WELL UNDER PRESSURE: Bank Audi has developed the expertise to work under extremely unstable conditions, according to Baz.|~|Before it was dragged into a 15-year civil war, Lebanon was known for its shrewd bankers, sophisticated financial environment and a resilient economy, whose government never defaulted on its international debts. Today, 15 years after the end of the war, the banking landscape again appears to be growing, with over US$40 billion in deposits at its 64 banks. At the top of the league is Bank Audi, which manages well over US$14 billion in assets. It is concentrating on expanding regionally and diversifying its products, and is surprisingly bullish about the prospects of the domestic economy. “If we have to compare the political environment of Lebanon today compared to what it used to be several months ago we have improved,” says Freddie Baz, the bank’s chief strategist. “Today there is a clearer vision about the future. A few months ago there was no vision. No one could [define what Lebanon is]; is this an independent country or a Syrian province?” Baz admits the Lebanese economy still faces imbalances because of the US$35 billion debt the government has accumulated over the past 15 years, as the country rebuilt its physical infrastructure without foreign assistance. But things are different today, he adds. “Now that things are moving again on the track that is required by the international community, maybe the time has come to see the international community deliver its implicit commitments. [US president] Bush and many European leaders, a few months ago after the assassination of [former prime minister Rafik] Hariri … clearly said if certain things materialise then the international community will be willing to commit much more,” Baz stresses. Saying that, Baz believes in the Lebanese economy and its ability to manage without having to resort to external financial assistance. The financial guru, who lived and worked in Lebanon while the war was taking place, believes the country’s banks have developed the expertise needed to surmount future instability. “Because of the difficult time they went through [during the war], Lebanese banks have acquired very important knowledge of managing uncertainties. Lebanese banks survived the war. No big bank failed,” says Baz. “I remember in the mid-1970s when we had to open our counters every day and had to walk between the bombs and snipers just to make sure the counter was open in case clients wanted to withdraw money. [This] today puts us in a very competitive position with respect to many other banks in other countries. We have developed skills in order to operate under very difficult environments. This is a competitive advantage. We have developed an immunity, which allows us to absorb very important shocks,” Baz explains. He believes there is also hope for a resurgence of the Lebanese economy, so long as the “right policy mix is adopted by the government on long-awaited actions and measures,” says Baz. He points out that, though the state is poor, Lebanon as a country is rich. Private sector resources, for instance amount to three and a half times gross domestic product (GDP). Lebanon’s GDP, according to the World Bank, stands at approximately US$20 billion. Although the country may have witnessed stagnant economic conditions, Baz also argues that Lebanon’s problems aren’t structural. “The problem would have been much more serious if the stagnation was related to the supply side. It would have meant that we have a problem in the production apparatus of the country; we have a problem in the status of capital formation of the economy, of the level of investment in the economy. [This] was not necessarily the case,” he explains. So what does Lebanon require now? If the new government is capable of implementing the necessary policies to improve the overall efficiency of the economy, reduce the financial burdens facing the public sector and provide incentives to the private sector, then Baz argues that GDP growth rates will increase. He also emphasises the importance of having the country’s massive debt restructured, and the need for the new government to focus extensively on spending on education, transportation and health. “This is a very important ingredient for investment and, therefore, for growth,” he adds. Baz’s bullishness on the Lebanese economy is justified, given Bank Audi’s expansion drive. The bank’s assets today amount for 55% of Lebanon’s GDP; giving the bank the financial muscle to absorb shocks as well as to grow. The bank has US$10 billion of assets, US$14 billion of footing and close to US$700 million of equity — and is therefore being forced to expand regionally. Many of the country’s leading banks have become so big that the discrepancy between their financials and the economic state of the country is increasing. “Size is always an important ingredient for solvency. There is the saying of being too big to fail. We (the top five banks) have reached such an important size in Lebanon, [it] allows us to play in the courts of the big players in the region,” says Baz. “We have developed a very important deposit attraction capacity. We cannot refuse deposits,” says Baz. Why is that? Baz says it’s because of a perception based on quality management, good financial capability in terms of capitalisation, a track record of having never failed in anything towards the bank’s obligations; to depositors or shareholders. Over the last two years customer deposits within Lebanese banks have increased by US$13 billion. Customer deposits within Lebanon are almost equal to those of the UAE. Private deposits in Lebanese banks amount to 65% of those in Saudi Arabia. In general, the near east is the region where Bank Audi believes it has the highest competitive edge. Such assessments are derived from comprehensive field studies carried out that essentially show that Bank Audi has something to offer, that it can develop enticing products, and interesting niches in those markets. Bank Audi recently entered the under-banked Syrian market following the entry of other Lebanese banks such as BLOM and BEMO. This was largely possible because of Syria altering its laws in 2003 and allowing private banks to operate in the country. The bank is also seriously considering entry into Iraq — and according to Baz, it is in advanced negotiations with the Central Bank of Iraq. “The near east is where we believe we have the highest value added despite the current levels of wealth in Lebanon, Jordan, and Syria where the banking structures are completely non-existent and Iraq and Palestine,” says Baz. “Those are really captive markets because there is still a lot to do. In Jordan we are talking about actual wealth not potential wealth. The prospects for the Jordanian economy are much brighter than the current situation.” The Gulf region appears to be equally promising for bank Audi and other Lebanese banks, even though it is much more developed in terms of its banking structure. There are still some fields where Lebanese banks can carve out a niche, according to Baz, including corporate finance and private banking services to high net worth individuals. “We are currently in the process of implementing an investment company in Saudi Arabia under the new law and we can duplicate this very quickly in the UAE,” he says. North Africa is another market that is on the map. “Egypt for us is a very enticing market. I believe there are captive markets for Lebanese banks in Sudan and Algeria — to a lesser extent maybe Libya,” says Baz. Algeria, he says, is attractive because of its size, its archaic banking structure and its status as a Francophone country. The country has a population of more than 32 million people and a GDP well above US$70 billion. Sudan’ is also a target because of the recent peace settlement there, its natural wealth and cheap labour, he says. “Things are evolving very quickly. We are a very dynamic bank and would consider any arising opportunity in any other country if we believe it will add value to our shareholders and our franchise as a whole,” explains Baz. Ten years from now, Baz believes Bank Audi will be on the same footing as the Arab Bank of Jordan, which has a network that spans the world. “We would like to be present in different countries, despite our regional expansion policy we have a policy to implement in the five continents,” says Baz. That may not be such a farfetched goal, given that Bank Audi has been operating in Europe for the past 30 years. In countries like France, its asset base of US$1 billion is almost four times that of Arab Bank. Bank Audi Suisse is also now the biggest Lebanese bank outside of the country and the second largest Arab bank in Switzerland after the Arab Bank. “The Lebanese have developed knowhow,” says Baz. “Every cloud has its silver lining. Because of the war, because of difficult times, we got trained to manage uncertainties.” ||**||

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