Leader

  Issue No 2, Aug 2002

The Case for Bank Mergers

The decline of Lebanon’s banking sector during the civil war years resulted in a regulatory slump that saw an overgrowth in the number of banks operating in the country. As a result, the post-war government that was established in the summer of 1992 turned its attention to the disarray by addressing the low levels of control and the high number of financial institutions with Decree Law No. 192, dated January 4, 1993. This law aimed to facilitate bank mergers and was initially valid for five years, until Decree Law No. 679 extended its validity for an additional period ending in January 2003.

Law No. 192

The main points of this bill include the following:

• The chairmen of banks willing to merge their operations (conditional upon approval from the Central Bank governor) have the right to exchange information regarding customers’ accounts.
This was considered by some to be an infringement of banking secrecy laws.

• The Central Bank can give merging banks the necessary loans based on certain conditions to be agreed upon by contract. The law does not specify a ceiling or the average interest rate for the loans.

• The Central Bank has the right to absolve the merging bank from income tax at a rate equal to a portion of the tax on their profits, providing it doesn’t exceed the cost of merging or the amount of LL 2 billion ($1,327,000). In addition, all procedures required to complete the merger are absolved from stamp, moving and registration fees.

• Permission to terminate the merged bank’s employee contracts, after providing employees with benefits and legal indemnities. An additional end-of-service indemnity is included with the proviso that it must providing compensation of no less than a 6-month salary and not in excess of a total of three years of income.

Law No. 110

Before promulgating Law No. 192, Law No.110, dated November 17, 1991, related to the reform of the banking situation, was already in place and dealt with the following issues:

• Granting banks that have suffered losses greater than one quarter of their capital, a one-year grace period, in order to recapitalize or have their names removed from the list of accepted banks.
• Giving the Higher Banking Committee substantial authority to liquidate precarious banks.
• The National Institute for Deposit Guarantee undertakes to guarantee the deposits of the relevant banks.

Challenges and Accomplishments

Operations undertaken in accordance with the Law of Facilitating Bank Mergers have resulted in 20 merger operations between big and small banks (see Table 1). The Central Bank of Lebanon acquired one of the troubled banks (Capital Trust Bank) and another bank was bailed out with the help of a group of its depositors (Bank of Credit and Commerce International), while Credit Lyonnais bought the Euro-Med Bank. All these actions have resulted in acquisition operations that led to the delisting of 23 banks. Also, a number of mergers have allowed the merged banks to get long-term loans at subsidized rates (or at zero interest) from the Central Bank, which has helped to reinforce their financial position.

Yet mergers have not lead to the emergence of big banking groups, as they have been restricted between large and small banks (on a Lebanese scale). Also, only six large banks have undertaken merger operations (Banque Audi, Byblos Bank, Bank of Beirut, Fransabank, Societe Generale de Banque au Liban and Credit Libanais).
Presently, there are 59 commercial banks in Lebanon and seven investment banks, attracting approximately $40 billion in deposits. Yet 14 of these banks have roughly $30 billion - equivalent to 75% of deposits. It is obvious that there is an excess in the number of banks in comparison to the deposit base and it becomes apparent that the required number of banks should not exceed 20. This is especially in view of the fact that the function of the banks today is mostly limited to receiving deposits and using them to lend to the government (56% of the total public debt is provided by the banks).

The limited risk embedded in such operations (as long as the government continues to pay the interest) have enabled banks to achieve annual net profits in the region of LL 590 billion ($391 million) in 1997, which decreased to LL 513 billion ($340 million) in 1999 and LL 326 billion ($216 million) in the year 2000.

In this environment of open borders and and the creation of big groupings, it seems that mergers between the big Lebanese banks are a necessity to permit them to continue and develop.

 

Merger Operations Schedule                                                           Table 1
Merged Bank Date of Merger Comments
Globe Bank SAL May 3, 1993 Bought by SGLB
First Phoenecian Bank August 24, 1994 Sold all assets and liabilities to Credit Libanais
Bank Geagea September 17, 1997 Bought by SGLB
United Bank of Lebanon and Pakistan November 26, 1997 Sold all assets and liabilities to Inaash Bank
Credit Bancaire de Moyen Orient November 26, 1997 Sold all assets and liabilities to Byblos Bank
Bank Tohme December 10, 1997 Bought by Fransabank
Banque Beyrouth pour le Commerce February 30, 1997 Sold all assets and liabilities to Byblos Bank
Unibank January 21, 1998 Assets, liabilities and obligations were transferred to Ark Financial Group and its name was changed to United Bank of Lebanon
Orient Credit Bank December 21, 1998 Assets and liabilities were transferred to Banque Audi
Al Mughtarib Bank February 3, 1999 Assets, liabilities and commitments were transferred to National Trust Bank which changed its name to United Bank of Lebanon on February 15, 1999
Banque de Credit Populaire May 11, 1999 Initially bought by a Lebanese and Arab group, and later a Lebanese group before merging with intercontinental Bank
Transorient bank June 23, 1999 Sold assets and liabilities to Bank of Beirut
Universal Bank November 3, 1999 Sold all assets and liabilities to Fransabank
American Express Bank Ltd. June 27, 2000 Sold all assets and liabilities to Credit Libanais
United Bank of Lebanon August 25, 2000 Sold assets and liabilities to Banque Libanaise pour le Commerce
Inaash Bank October 10, 2000 Sold assets and liabilities to SGLB
Jordan National Bank May 23, 2001 Sold assets and liabilities to Ahli International Bank (previously Bank of Lebanon and Kuwait)
Wedge Bank September 19, 2001 Sold assets and liabilities to Byblos Bank
United Bank of Saudi and Lebanon October 3, 2001 Sold assets and liabilities to Fransabank
Beirut Riyadh Bank May 29, 2002 Sold assets and liabilities to Bank of Beirut
   

Source: Information International

 

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