By Nick Kochan
On a recent visit to Beirut, Euromoney interviewed the long-serving governor of Lebanon’s central bank, Riad Salamé, to discuss the challenges facing the country’s banking sector
What are the big challenges for Lebanon’s banks?
The main challenge is the low rating given to the Lebanese Republic. Our B– rating is undeserved and entails our banks making capital requirements that have an effect on their operations. Other challenges are the high levels of liquidity in the banks, their compliance with international standards on sanctions and the management of risk in international expansion.
|Riad Salamé says the banks |
face plenty of challenges
and opportunities in Lebanon
We work in an environment that is not really investment friendly because of the situation in the Middle East and particularly in Syria. The rating agencies say the low rating is linked to political instability and security risks. The absence of a national government that can make reforms is another factor. There is a divorce between this reality and what is happening in the banking sector. The markets are telling us that because of our monetary strengths, they don’t really expect a crisis or excessive risks on Lebanon. If you look at the level of interest rates on Lebanese Eurobonds in dollars, you see that a 10-year Eurobond is traded today at 6.5% in the secondary market. The rates for similarly rated countries are 10% for the same maturity.
Although the markets are not reacting on the basis of the ratings, when you implement Basle III you have to take into account the different criteria. Among them is the rating of the country. The ratings don’t reflect the reality.
If we look at the interest rate at which Lebanon borrows, our rating is determined by the market to be BB+ or BBB. The markets are treating us differently to the B– rating that we get from the agencies.
How are you seeking to change banks’ culture?
The central bank is requiring banks to introduce committees for risk, for good governance, for remuneration and for consumer protection. That will entail a change in the culture of the banks and the way they operate. They will also have to appoint people to implement the cultural change. Transparency and compliance are of prime importance, and banks are also having to meet the requirements for sanctions on neighbouring countries such as Syria, and sanctions on certain political parties and individuals.
Does the size of the banking sector pose a problem to the wider economy?
We have a banking sector that is growing faster than the economy. In that sense banks have a negative carry, due to the high liquidity they are accumulating. They are under pressure to be more imaginative in order to create profit growth. Banks have the challenge of regional exposure to manage. Lebanese banks are present in Syria and Egypt and in other Arab countries and Mediterranean countries experiencing difficulties. The banking sector has come through the Syrian crisis, the Egyptian turmoil, the Cyprus crisis, and their expansion outside Lebanon is now more limited. But they have to act prudently. That is a deterrent to the growth in the returns.
How satisfied are you with the resilience of the banking system to crisis?
We have ensured that our banking sector has 11 large banks, so the risk is diversified. If there is a problem, the consequences are not drastic for the economy. We are not reliant on one or two banks and we don’t have the dilemma of one bank being too big to fail.
We don’t believe in making banks that run into problems bankrupt. We have developed a law that allows us to help financially when there is a merger between two banks. Our exit strategy is to use this law and the merger process to ensure we don’t have bank failures. Lebanon is a small country, and confidence can quickly evaporate. So our policy is clear. The number of banks has decreased by half, not by bankruptcy but only by mergers. It has helped the confidence, and that explains the increase in deposits.
Do you expect bank consolidation to continue?
The number of bank groups with Lebanese shareholders and management does not exceed 28, whereas 20 years ago it was more than 60. This consolidation trend will continue because of the cost of doing business and because of the competition. This is driving down margins. There will be more consolidation. We are not forcing that and we are letting the market decide.