Lebanese banks' long-awaited 2020 earnings statements reveal the disastrous consequences — for shareholders and customers alike — of their reliance on investing in government debt to make profits.
Lebanon's financial sector faces losses of 154 trillion Lebanese pounds, or about $102.2 billion, should a much-delayed restructuring plan be agreed after the country defaulted on its debts amid spiraling current account and budget deficits. These totaled $120.1 billion as of August, the most recently available data shows.
A devastating explosion in Beirut's port in August compounded a longer-term economic crisis that was fueled by mismanagement, a tourism downturn and falling remittances from the Lebanese diaspora, putting additional strain on the country's banks.
The big four banks have belatedly published earnings 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 to Sept. 30.
These suggest the banking sector is insolvent. Bank Audi, which released substantially more detailed accounts, said its exposure to Lebanese sovereign debt was 2.25x its Tier 1 capital. As of June 30, it held $2.2 billion of pound-denominated treasury bills, plus $4.05 billion in central bank certificate of deposits, most of which are denominated in foreign currencies.
"Government debt is over half banks' balance sheet, so if there's an 80% to 85% haircut on this debt it leaves a hole that is impossible to plug," said Khaled Abdel Majeed, a director at London's SAM Capital Partners, where he manages two funds investing in Middle East and North Africa stock markets.
"Whether it's Bank Audi, Blom, Byblos, or whomever, they're all in deep trouble," he said. "The banks' survival is tied to the survival of Lebanon itself."
Bank Audi's financial statement warns large depositors will be required to convert part of their savings into bank capital, equity stakes or subordinated bank obligations with no or limited interest.
"What's the point of getting Bank Audi shares if Bank Audi is broke? Until there's a solution for the government debt and the economy as a whole, everything else is a waste of time," said Majeed.
'The banking sector is dead'
Shareholders will be wiped out, the restructuring plan recommends. Blom Bank's share price has fallen 84% since the beginning of 2018, and Bank Audi's by 78%.
"The banking sector is dead," said Sami Nader, an economist and director of Beirut's Levant Institute for Strategic Affairs.
"There's no escape for the banks in their current form — they need to restructure, recapitalize and reorient their business toward funding the Lebanese economy and not lending to the public sector. We need a new fiscal policy to reduce the budget deficit, a new economic policy to fix the balance of payments, a new monetary policy, and to restructure the banking sector."
First-nine-month impairment losses on financial assets at Blom and Bank of Beirut surged to 735.2 billion pounds and 496.0 billion pounds, respectively. Byblos Bank's half-year impairments rose 28-fold to 701.5 billion pounds.
Bank Audi's half-year impairments more than doubled to 292.4 billion pounds, while 60% of its financial assets are underperforming or impaired. It also tacitly acknowledged its accounts were largely guesswork, noting it was "very difficult for management to assess the effects of the Lebanese crisis on the financial statements of the Bank" and warning its assets and liabilities would be recalculated should Lebanon conclude a debt restructuring.
Retail and commercial loan defaults will likely soar, with Lebanon's economy forecast to contract 25% in 2020 and monthly inflation at 131%. Most car and housing loans are denominated in dollars. The U.S. currency has long been pegged to the Lebanese pound at 1,507.5, but the black-market exchange rate is above 8,000. For now, borrowers can still make repayments in Lebanese pounds at the official exchange rate.
"This isn't sustainable. Yet if the currency is allowed to float and find its real rate, there's no way people will be able to settle these loans in dollars," said Nader. "The longer the crisis continues the greater the increase in nonperforming loans. People are trying to meet their loan repayments, but their salaries have an ever-declining purchasing power."
Declines in loans, deposits
From the start of 2019 to June 30, 2020, the banking sector's combined loan portfolio shrunk by $16.5 billion, according to Bank Audi. Its own domestic loan book fell $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 "historical low" of 20%.
"Management believes that the quality of the loan portfolio will remain subject to considerable pressure in the near future," stated Bank Audi, which allocated $1.2 billion in 2019 and its half-year 2020 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 Lebanon, while Bank of Beirut's nine-month net income plunged 89.3% to 19.0 billion pounds. Byblos Bank's half-year loss was 3.9 billion pounds, versus a profit of 86.3 billion pounds a year earlier.
Banks also suffered sizeable declines in their deposit base despite strict central bank limitations on withdrawals.
"You can't even open a bank account because for each dollar deposit a bank takes it has to leave capital at the central bank as part of the reserve requirements — banks don't want to do that and they can't raise their own capital so they're not accepting new accounts," Majeed said.
"Loan demand is down. No companies are investing to expand their businesses. That means there's less loan and fee income. It's paralysis."
As of Dec. 14, US$1 was equivalent to 1,510.50 Lebanese pounds.