Lebanese bank profit deferral reveals extent of country’s woes

Lebanese banks’ long-awaited tax returns for 2020 reveal the dire consequences – for shareholders and clients alike – of their reliance on public debt investments for profit.

Lebanon’s financial sector faces losses of 154 trillion Lebanese pounds, or about $ 102.2 billion, if a much delayed restructuring plan is agreed after the country defaults on its debts amid deficits increasing currents and budgets. These totaled $ 120.1 billion in August, according to the most recent data available.

A devastating explosion in the Port of Beirut in August exacerbated a long-term economic crisis fueled by mismanagement, a slowdown in tourism and declining remittances from the Lebanese diaspora, putting additional pressure on the country’s banks.

Earnings

The big four banks belatedly published their income statements – Bank Audi SAL and Byblos Bank SAL for the first half of 2020, and Blom Bank SAL and Bank of Beirut SAL for the nine months until September 30.

These suggest that the banking sector is insolvent. Bank Audi, which published much more detailed accounts, said its exposure to Lebanese sovereign debt was 2.25 times its Tier 1 capital. As of June 30, it held $ 2.2 billion in bonds from the Treasury denominated in pounds sterling, plus $ 4.05 billion in central bank certificates of deposit, most of which is denominated in foreign currencies.

“Public debt represents more than half of banks’ balance sheets, so if there is an 80 to 85% discount on this debt, that leaves an unfinished hole,” said Khaled Abdel Majeed, director of SAM Capital. Partners in London, where he manages two funds investing in the stock markets of the Middle East and North Africa.

“Whether it’s Bank Audi, Blom, Byblos or whoever it is, they all have big problems,” he said. “The survival of the banks is linked to the survival of Lebanon itself.”

Bank Audi’s financial statements warn that large depositors will be required to convert part of their savings into bank capital, stocks or subordinated bank bonds without interest or with limited interest.

“What is the point of getting Bank Audi shares if Bank Audi is bankrupt? As long as there is no solution for the public debt and the economy as a whole, everything else is a waste of time,” Majeed said.

“The banking sector is dead”

The shareholders will be wiped out, advocates the restructuring plan. Blom Bank’s share price has fallen 84% since the start of 2018, and Bank Audi’s has fallen 78%.

“The banking sector is dead,” said Sami Nader, economist and director of the Levant Institute for Strategic Affairs in Beirut.

“There is no escape for the banks in their current form – they must restructure, recapitalize and reorient their activities towards financing the Lebanese economy and not towards lending to the public sector. We need a new fiscal policy to reduce the budget deficit, a new political economy of balance of payments regularization, a new monetary policy and restructuring of the banking sector.

Impairment losses on the financial assets of Blom and Bank of Beirut in the first nine months jumped to £ 735.2 billion and £ 496.0 billion, respectively. Byblos Bank’s half-yearly write-downs increased 28-fold to 701.5 billion pounds.

Bank Audi’s half-year impairments have more than doubled to £ 292.4 billion, while 60% of its financial assets are underperforming or impaired. He also tacitly admitted that his accounts were largely conjecture, noting that it was “very difficult for management to assess the effects of the Lebanese crisis on the Bank’s financial statements” and warning that its assets and liabilities would be recalculated if Lebanon entered into debt restructuring.

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Commercial and retail loan defaults are likely to soar, with the Lebanese economy expected to contract 25% in 2020 and monthly inflation to 131%. Most auto and home loans are denominated in dollars. The US currency has long been pegged to the Lebanese pound at 1,507.5, but the black market exchange rate is over 8,000. For now, borrowers can still make repayments in Lebanese pounds at the exchange rate. official.

“It is not sustainable. Yet if the currency is allowed to float and find its real rate, there is no way people will be able to settle these loans in dollars,” Nader said. “The longer the crisis lasts, the greater the increase in NPLs. People are trying to cope with their loan repayments, but their wages have steadily declining purchasing power.”

Decrease in loans, deposits

Between early 2019 and June 30, 2020, the banking sector’s combined loan portfolio shrank by $ 16.5 billion, according to Bank Audi. Its own domestic loan portfolio fell from $ 1.1 billion to $ 3 billion in the first half of 2020, reducing its domestic loan-to-deposit ratio to what it described as an “all-time low” of 20%.

“Management believes that the quality of the loan portfolio will remain under considerable pressure for the foreseeable future,” said Bank Audi, which allocated $ 1.2 billion in 2019 and its 2020 half-year profits to expected credit losses.

Blom’s nine-month net profit fell 84.4% to $ 55.3 million, and said its profits were largely generated outside of Lebanon, while Bank of Beirut’s nine-month net profit fell. dipped 89.3% to 19.0 billion pounds. Byblos Bank’s half-year loss was £ 3.9 billion, down from a profit of £ 86.3 billion a year earlier.

Banks have also suffered significant declines in their deposit base despite strict restrictions by central banks on withdrawals.

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“You can’t even open a bank account because for every dollar a bank deposits it has to leave capital to the central bank as part of the reserve requirements – banks don’t want to do that and they can’t raise theirs. . capital so they don’t accept new accounts, ”said Majeed.

“The demand for loans is down. No company is investing to grow their business. That means there is less income from loans and commissions. It’s paralysis.”

As of December 14, US $ 1 was equivalent to 1,510.50 Lebanese pounds.

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