KPMG: A Learning Curve For Overbanked Lebanon; M&As Inevitable

With the number of active commercial banks considered to be relatively high in Lebanon when compared to international norms, the Central Bank of Lebanon’s move to consolidate the banking sector is a right step and will promote healthy competition among banks and benefit bank stakeholders, a white paper released by KPMG, a leading provider of audit, tax and advisory services, reveals.

“The Lebanese banking system has a solid foundation that has been supporting the economy for many years, but the current economic conditions in Lebanon have been unstable for a prolonged time. So, it is the right time to look into the sector with a critical eye to avoid a downfall that might be triggered by a slip of one of the small banks,” said Nafez Almorhabi, the Chief Executive Officer & Partner of Advisory, KPMG Lebanon.

“The Central Bank of Lebanon may need to follow footprints of other local and international regulatory authorities and take necessary actions that would further encourage consolidation and ensure that the promised synergies are fully exploited, while post-consolidation challenges are reasonably mitigated, said Almorhabi.

Over the last three decades, there has been a considerable decline in the number of banks in both developed and developing countries, driven mostly by voluntary mergers that help unaffiliated banks to form banking alliances. After the recession of 2007-2009, the voluntary merging trend intensified and resulted in the lesser number of banks worldwide.

The White Paper provides details of the successful consolidation process in the Italian and Spanish banking sector.

In 2009, Spain commenced a series of consolidations, through mergers, acquisitions and interventions. While the number of commercial banks decreased from 231 to 187, the number of banking entities/SSBs decreased ever further from 51 to 12, highlighting the disappearance of small banks as independent entities following their acquisition by larger groups.

Following Spain’s footsteps, Italy has been implementing a similar banking restructuring strategy since late 2016. As a result, the number of commercial banks has come down to 400 from 440 in 2017.

In an effort to encourage M&A activity within the banking sector, the Central Bank of Lebanon offered banks several incentives under law number 192, which included granting the acquiring bank necessary loans on concessional terms, exemption on income tax, stamp, transfer and notary public fees, tax benefits and end-of-service indemnities for dismissed employees, etc.

According to the KPMG white paper, mergers & acquisitions (M&As) can be a valuable tool to diversify a bank’s portfolio which allows for employing more of the reserves and reaching higher profitability rates while maintaining a comparable risk matrix.

"Consequently, with every successful merger, the banking system gets sounder, creating larger and more resilient banks, while customers get wider access to credit at lower rates, hence, mergers benefit local economies. We believe the Central Bank of Lebanon needs to push for more bank consolidation by offering additional incentives" added Almorhabi.