Banks shocked and awed
by capital increase demand

Valuation and investor appetite are major obstacles

Bankers have been taken aback by a circular issued by the Central Bank (BDL) this week mandating them to increase their capital by ten percent before the end of the year and a further ten percent before the middle of 2020. The banks’ capital needs to be increased using fresh funds. The circular instructed banks not to distribute dividends from their 2019 profits. The two increases in capital are equivalent to $4 billion. BDL’s circular aims at solidifying the banks’ balance sheets, to attract dollars from abroad, and prevent capital flight. Billions of dollars have exited the local banking system since the beginning of the year, exacerbating an already bleeding balance of payments.

Most of the bankers contacted by Lebanon Opportunities have not been willing to go on the record for this story.

BDL said that the decision is part of the capital adequacy regulatory framework for banks operating in Lebanon. Tanal Sabbah, Chairman of the Lebanese Swiss Bank, said that the downgrade of the country’s credit rating has reduced the Capital Adequacy Ratio (CAR) of the banking sector and that the capital increase will improve this ratio. “The capital increase gives good signals to the market and will boost the banks’ foreign assets,” he said. “This capital increase – if successful – would contribute to capital inflows as shareholders would transfer funds from their accounts abroad,” said Marwan Mikhael, Head of Economic and Equity Research at Blominvest Bank.

Several bankers have told Lebanon Opportunities that increasing their capital in this fashion will be impossible for many banks. They also pointed out to several problems, including valuation, the lack of appetite among existing or prospective shareholders, and the consequences if a bank does not comply. Listed banks have been trading below their book value, and their share prices have decreased significantly since the beginning of the year.

Bank Audi’s shares were on offer today at $3.5 down from $4.7 at end-of- April. The bank’s global depository receipts (GDRs) (reflecting trading overseas) were offered at $2.76 per share, down from $4.4 in April.

A major challenge is the valuation upon which the increase in capital will be made, especially for non-listed banks that have no market reference. The equity hike must represent 20 percent of a bank’s capital (common equity tier one) as at the end of 2018. The banks’ stocks have since lost value. Most large banks have been valued or are trading at an amount well below their book value. There was limited consultation conducted between the BDL and the banks prior to the circular. “Fix it,” said the Governor of BDL to a delegation of banks, according to the chairman of a bank who requested anonymity. “We can no longer underwrite the failures of the political leadership,” said another bank’s chairman. “The share valuation will be based on the book value both for listed and non-listed shares,” said Mikhael. The capital increase will not be carried out through a public offering of shares. It will be through cash contributions targeting mostly existing shareholders.

The circular has not specified the penalties to be imposed on banks that do not comply. Historically, BDL has engineered solutions for banks that were facing liquidity difficulties, but these were isolated cases that were dealt with by encouraging mergers, low-interest acquisition loans, and other measures. BDL has never faced a systemic issue. It has been pushing banks to continuously increase capital and liquidity, pushing the banking system to surpass the minimum requirements mandated by the Basle II and Basle III agreements. The most extreme measure would be to take away the license of non-compliant banks. “We would rather lose the license than place our shareholders under such additional and heightened systemic risk,” said the chairman of a medium-sized bank.

Reported by Ramzi El Hafez and Shikrallah Nakhoul