Jean Riachi, founder and CEO of FFA Private Bank talks to Global Finance about the current state of the Lebanese banking industry.
Global Finance: How is the current crisis affecting Lebanese banks?
Jean Riachi: It’s very bad for Lebanese banks. Their assets have become impaired, especially since they lent more than 70% of their deposits to the public sector. But their private sector loans are also going to be affected by the recession.
You also have a liquidity crisis because most of the deposits are in US dollars, and the banks have depleted all the dollars they were holding with their foreign correspondents. They are no longer able to do transfers, including business payments for importers, and they are not able to give bank notes in foreign currency to their clients.
The money they have with the central bank is not available for transfer because the central bank has negative net reserves and very low gross reserves. It’s a very big banking crisis.
GF: How is the crisis affecting your bank?
Riachi: It’s not, for the simple reason that we chose a different business model. Most of our business is agency based, commission based, so we have very little exposure to the central bank and no exposure to the government debt. Our liquidity is mostly abroad. Most our revenues now are generated through our Dubai subsidiary, where many accounts were transferred.
Paradoxically, we are even starting to play a role as an investment bank. At a time when most banks are almost shut down and depositors are afraid to keep their money with local commercial banks, a lot of people are looking for alternative investments inside the country where their money is locked. This crisis is, in fact, the start of revival of financial markets in Lebanon.
Previously, the size and power of traditional commercial banking was huge in Lebanon. There was no space for intermediated transactions to take place. Just look at the number of companies listed on the stock exchange—there was nothing happening. Today it’s finally moving, so we have a lot of work helping companies raise money from private investors.
GF: What is the prospect for Lebanese banks?
Riachi: I think the banking sector in Lebanon was oversize in terms of the size of deposits and the number of banks. It was also a very traditional way of financing the economy. So, I think the landscape in the future will be much fewer banks, more activity through financial markets as well as much lower levels of deposits and loans.
GF: Do you see mergers and acquisitions on the horizon?
Riachi: No, because I think all the banks are in bad shape. It will have to be handled as a public policy issue by a specialized body, which will decide what banks are meant to be kept alive or disappear. It might happen through mergers, but some banks will need to be liquidated because you have too many branches at a time when, globally, the number of branches and amount of human resources is shrinking to be replaced by technology. We will have to catch up with two trends: financial markets and digitization.
We have too many banks. It makes no sense. Many of them have no business model except collecting deposits to put them in the central bank and/or lend them to the government. But in the future, there will be a problem of competitiveness. If you don’t have the scale and the product mix, you will disappear. There is no way that so many banks may survive.
GF: Do you envision foreign banks buying Lebanese entities?
Riachi: I think this will happen, but once all the imbalances in the system—like the size of government debt and the imbalance of the central bank—are fixed. Foreign lenders will not come in an environment where the central bank has negative net reserves, and they will not buy banks that have negative equity. You need to make sure the banks take all the necessary provisions on impaired assets. And after this cleaning up has taken place, they also need to recapitalize—probably through bail-ins from depositors—and then you will be able to attract foreign banks.