Banque du Liban (BDL)’s assets increased by 16%

Shanda Consult Ltd, May 15, 2018

According to Lebanon’s Central Bank or Banque du Liban (BDL)’s balance sheet, total assets of the bank reached $118.3 billion at the end of 2017, rising by $15.9 billion which is 16% increase compared with the previous year.
Moreover, the securities’ portfolio of the Central Bank increased by $3.4 billion, or 13 percent and reached to $29.3 billion over the same period. The portfolio largely includes subscriptions to treasury bills which are issued by BDL and covered by certificates of deposit (CDs) in lira. Local banks use CDs to lend to the government through the Central Bank.
As reported by Blominvest Bank, gold reserves rose 12% to $11.96 billion driven by increase in the price of gold to $1302.45 / ounce in December 2017 compared with $1158.24 / ounce, last year.

In financial sector, deposits surged by 16% ($13.3 billion), to $97.5 billion. There are different forms of deposits by the banks at BDL which include lira and dollar deposits, reserve requirements, and certificates of deposit (CDs). Also, The Central Bank doubled loans to the financial sector to $12.7 billion which added $6.3 billion to total assets.

After the financial engineering operations of 2016, the central bank’s exposure to the banking sector has improved. However, BDL had to provide short term bridge loans to some of banks which participated in these swap operations in order to top up their liquidity in dollars, because these banks joined the financial scheme, beyond their capacity in dollar liquidity. Today these banks try to collect additional funds by offering appealing interest rates on dollar deposits, in order to pay back the BDL bridge loans, according to a source.
The Financial Engineering Operations

The financial engineering operations were carried out between Banque du Liban (BDL), Lebanon’s central bank and commercial banks in summer 2016 with the aim of strengthening banks’ balance sheet and to bring in new $-funds to BDL through banks.

According to a report from BDL, the financial engineering mechanism was performed as follows:
- BDL swapped Lebanese Pound (LBP) treasury bills (TBs) held in its portfolio with equivalent Eurobonds issued by the Ministry of Finance, amounting to USD 2 billion.
- BDL sold the recently acquired Eurobonds and issued USD Certificates of Deposits (CDs) to commercial banks against fresh USD inflows provided by banks.
- BDL discounted at 0% an amount equivalent to the previous transaction (Eurobonds and USD CDs) of LBP denominated debt held by commercial banks in their portfolio. This transaction was subject to voluntary 50% haircut on interest in favour of BDL.

Objectives of the Financial Engineering Operations

As stated on the same report, this scheme improved BDL’s balance sheet as well as Lebanon’s credit profile. Some of the main objectives were achieved by the financial engineering operations are:

1. Strengthening BDL’s foreign currency assets which have reached to around $41 billion.
2. Banks would be able to constitute additional general reserves ahead of the implementation of IFRS 9 in January 2018 and to reach the BDL targeted capital adequacy ratio of 15% (end 2018), which is above the international capitalization requirements (Basel III).
3. Liquidity in local currency (LBP) has increased which enabled banks to expand their credit portfolio, especially to SMEs.
4. Interest rates have decreased which led to improve the government debt profile by reducing the cost of borrowing and as a result of this improvement, international financial institutions have encouraged their clients (pension funds and asset managers) to invest in Lebanese Eurobonds.
5. The financial engineering mechanism improved the balance of payments by turning a cumulative shortage of $1.7 billion in May 2016 into a cumulative surplus of $555 million in September 2016.
6. Lebanon’s rating and outlook have changed from negative to stable.

Economic Growth in Lebanon

Lebanon has a free market economy and non-interventional trade habit. However, it is struggling with negative consequences of regional conflicts such as Syria’s civil war and Iran-Saudi tensions, on the country’s economy. Lebanon tries to improve its economic situation by increasing investments and exports in 2018. Also, according to Bloomberg website, Lebanon is to sign an agreement with management consulting firm McKinsey & Co. in order to restructure a new economic vision to improve banking and financial sectors as well as dealing with the high rate of unemployment in Lebanon, Economy and Trade Minister, Raed Khoury, said.
Source: Businessnews.com.lb
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