Interviewed By The Asian Banker Live
Saad Azhari, chairman of BLOM Bank, shares how the bank has become a leader in commercial and retail banking and his views on the current situation of Lebanon’s banking sector.
Here is the transcript of the video:
Emmanuel Daniel (ED): Today, I’m very pleased to speak with Saad Azhari, a prominent figure in the Lebanese banking industry and chairman of BLOM Bank, which is one of the largest banks in the country and in the region. He has led the bank in a profound way, especially in the last few years given all that’s happening in the region, to strengthen its balance sheet and give it direction going forward.
I’m very happy to be able to speak with you today, and I’d like to capture from you, Mr. Saad, a sense of running a business in this region today, strengthening the balance sheet of your business, and creating a stable environment for your future growth. Also, I’m very interested to get your sense of how the Lebanese banking industry has evolved, given the fact that Lebanon was the original Switzerland of the region, and where it is today. So, thank you very much for speaking with me today.
As the scion of the Azhari family, give us a sense of your own journey in banking. Did you always know that you were coming back to lead the family bank, and if you did, what was the execution in the 1990s and what is it today?
Building BLOM Bank as a leader in Lebanon
Saad Azhari (SA): Thank you for coming here. I’m very pleased to welcome you here.
So, maybe I will start with the end. As a family, my father always used to say that he didn’t want any of his children to follow him in banking. It’s not a family bank. My father came to a bank that was established by four families, and then he came in – it was the smallest bank in Lebanon and then became the largest bank – on the basis that he would diversify the shareholders. He had a stock bonus in the beginning, and he had shares. Today, we are the biggest shareholder, but we don’t control the bank. We have around 10 or 11 percent of the bank, so we are the biggest shareholder, but if we don’t do a good job, the shareholders can remove us, so it’s not a family business.
I was always very close to my father. I was interested in what he was doing, but when I graduated from school and had good grades, like all good students, I went into engineering. Good students either went into medicine or engineering, so I went into electrical engineering. I studied electrical and communication and I did my Master’s in engineering, and then I did my MBA.
I started my career with a Swiss bank that was part of the UBS group. It’s used to be separate, called in 1986 PBZ (Privatbank), and then it was acquired by UBS.
ED: This is in Zurich?
SA: Yes, it is in Zurich. I came because I had a good background in computer engineering and an MBA. I came as a project manager of SOFFEX, the first computerised exchange in Switzerland. So, I came to the bank as a project manager of this project, and I stayed five years. I started working on this project. At the same time, due to my origin and my links, I was starting to look at customers in the region, and I gradually became the head of the Middle East and the Hong Kong offices of that bank.
And then, at a certain time, my father had health issues, and other shareholders were saying, “You have successful children outside, working in other places. Why don’t you bring them? We trust the family. Why don’t you bring them to the institute?” And that’s effectively what happened. So, we weren’t aiming for it, but we moved to the bank.
ED: Just give me a flavour of the institution in those days. Were your customers high net-worth individuals? Was that the nature of banking in Lebanon? Was there any similarity with the private banks in Switzerland?
SA: Lebanon, in the past, say between 1975 and 1990, was in civil war, and the banks stayed very traditional, taking deposits, giving loans. They were very conservative banks, very liquid banks. So, it was completely different. When I started working in Switzerland in 1986, I worked mostly in private banking. I was on the side of private banking, and it was completely different from the BLOM commercial banking activity in Lebanon and elsewhere.
Effectively, when I moved from PBZ Privatbank – the UBS group – to BLOM Switzerland, I moved the bank there from being a commercial bank to becoming a private bank in Geneva because, at that time, most activities were dealing with customers for their business in Switzerland. And I thought the aim of having a Swiss license was to work in private banking, and the private banking activity was very limited.
So, I moved the bank there, and I was very successful. Every year, profits up as I work for the bank in Switzerland. I moved the bank to do more private banking, and also I strengthened the private banking activity of the bank.
At the same time, I started taking night lessons in terms of commercial banking because I knew that the bank’s main business was commercial banking. I stayed for a long while working in private banking.
Today, I would say that the bank is much more of a full-service bank. It moved from being a commercial bank to a full-service bank. Its strength is in retail banking and in private banking, asset management. We are strong in different types of activities, so now it’s more of a general bank than just a commercial bank.
ED: Although it’s a general bank – and I can see from the profile that you are in all of the range of commercial banking– at the end of the day, a bank’s core business is a certain aspect of it. Is it retail? Is it small business? Is it more wealth management? Which are your anchor businesses today?
SA: Let’s say that we are a leader, a clear leader in Lebanon’s retail lending – in car loans, housing loans, credit cards – we are definitely a leader, and we are very strong in this area. Also, when we move to other countries in the region, we take the leadership role. For example, we opened in Jordan. Within a couple of years, we became the leader in retail lending in car loans.
So, really, we have a good system in retail. Retail was growing at a faster pace, and now, we are more balanced between commercial and retail. We are also very strong in commercial. Before, we used to only have large customers. We also had an SME department, and now we are very strong in the SME. In lending, we are well-diversified between commercial SME and retail.
We are also a leader in Lebanon in private banking but private banking activity is much smaller than commercial banking.
ED: You’re an engineer by training, which means that you understand the process and you understand cost-to-income. I’m actually amazed that your cost-to-income is in the 30s range and you’re running a full-function commercial bank in a country that’s not very large. How do you manage your costs? Is it more of the net interest margin aspect or is it more operational?
SA: It is both. I think, to properly manage a bank, you have to look at the day-to-day operations, while at the same time looking at a vision of the future. So, I really believe that you have to be hands-on and to control the cost. It is very important to control the cost and control the risks because, at the end, if you don’t control the risk, you’ll have non-performing loans (NPLs), and then you’ll have to have provisions. So, I think it’s very important.
We have been very careful because, at the end, we have to perform. If we don’t perform, we cannot continue. So, even though we are considered to be the safest bank, having the best ratios in terms of liquidity, we also have the best returns in terms of equity. We have been efficient, and the reason, like you said, is that our cost-to-income is very low and much lower than the competition. Most of them are close to 50, and we are below 40.
We have managed extremely well. We have also grown, mostly organically. We did not acquire any bank in Lebanon. Maybe, we are in the process of acquiring a bank. Maybe we can talk about it. But in general, we were very careful not to acquire a bank just to grow. We are always looking in terms of the best interests of our shareholders. So, I think we have done a good job in terms of controlling the cost.
ED: In controlling the cost – you have less than a million customers, about 900,000?
SA: Well, I guess we have around 500,000.
ED: In China, for example, there are 419 million customers. The best US institutions, for example, have about 60 million customers. So, anything that you invest in, such as technology and process, you start by being subscale, and that’s looking at you from the outside looking in. How do you deal with scale as a factor in your business?
SA: You have to look at Lebanon and the region. In Lebanon, the population is small, so when we have fewer than 500,000 out of a population of four million, we have a good proportion. And I have to say that we have extremely qualified staff.
ED: The skillset?
SA: Yes, we have an excellent university and excellent staff, and that is not only by Lebanese standards. We are taking those staff and using them, a lot of times, when we go abroad – in the Gulf, in other countries, in Egypt, and in Jordan. Few of them can turn around a situation in different countries. So, we have good process, a good staff, and, until today, all the systems. Sometimes, we create products that are the first in the world, and they’re all created by our own IT people. We have a very qualified staff and excellent management.
This differentiates us from the other regional banks. If you go, for example, to some of the Saudi banks, they’re huge with big balance sheets, but you don’t see depth in management. They don’t have the quality of the staff. So, when they go abroad, they are not that successful. When they go to Jordan and Egypt, they are not that successful because they don’t have the ability in the staff. They are good in terms of having balance sheets. They can take big loans, but they are not strong in retail, and they are not strong in private banking. They are weak in different areas.
ED: So, when you try to balance the requirements on transaction banking or corporate banking side and the retail side, are you the person who drives both sides, or do you trust all of the people who help to drive it forward – especially retail because, today, retail has a lot to do with innovation and customer-centricity and stuff like that? Are you the man driving that?
SA: I’m not the only person. We have a very strong management team, and I delegate. Today, I have four general managers, and each general manager – depending on his strength – has areas that he looks after. I have a very strong general manager who is looking at strategy and retail. I have another general manager looking at the day-to-day operation. I have another general manager who is very good in terms of looking at compliance, audit, and credit. So, I look at each person to see what his strength is…
SA: I delegate, and I have four general managers. Each general manager has specific strengths. So, I have a general manager who is responsible for retail and strategy. I have another general manager who is looking at operations. I have another general manager who is very strong in terms of compliance, audit, and risk. So, I’m not running the whole bank and supervising all the departments. At the end, I have a daily meeting with all the general managers and we discuss everything. I am aware of everything but I definitely have different people who have different strengths.
ED: How do you think you are perceived by your employees? When you think about how you look to your employees looking back at you, do they see a great coordinator? Do they see a great organic builder? Do they see a visionary? What do you think they see?
SA: You have to ask the employees.
ED: But what is the feel?
SA: We are hands-on. Let me put it this way. What I hear from customers and employees is that, a lot of times, you have a chairman or CEO who is a bit far away. My door is always open. Whenever somebody wants to see me – customer or employee – I am always available. I come early to the bank. Before 7:30, I am here. I stay late. The interaction with the people at the bank is very strong, and also with the people dealing with the bank. Just today, an important customer told me that he has spent three months trying to see the CEO of a smaller bank, and he’s not been able to see him. Whenever he calls me, I can set him an appointment either that day or the next day.
We are much more, I believe, hands-on and easy-access. So, this is something that I believe people feel – that they can have easy access to the top of the institution.
Separating banking from politics
ED: In the years of being chairman and, before that, a chief executive, what are some of the difficult decisions that you’ve made? One of the reasons you caught our attention is because of the way you engineered the bank’s exposure to the current Syrian crisis. How did you handle that crisis, what was involved, and where are you taking it?
SA: Well, I have to say that we had – if I can put it this way – an excellent record with what happened in Syria. When the situation in Syria started in 2011, we had a loan portfolio there of $675 million. Today, if you look at the provisions we have taken, we are below zero. We have $20 million to $22 million of loans, and we have provisions of more than that. We were one of the largest private banks. Other state-owned banks had a much bigger balance sheet because the privately-owned banks started in Syria in 2005.
We had one of the largest portfolios, and now we have the smallest. Because we had good customers, we had very, very few problems. Even during the war, they were able to repay the loans. Even today, we have remained operationally profitable in Syria. So, we have an excellent record, and we are continuing there, even though now it’s on a much smaller scale with much smaller activity. We believe that when things stabilise – we are thinking long-term – we’ll grow again in Syria.
We believe in choosing the proper customers and avoiding – I would say always, wherever we go – being involved in politics or relationships with top people. We are really professional bankers, in Lebanon and elsewhere. We are only bankers and professional bankers. This segregation is not only for the top management. We force it on all the staff, that we are only bankers, that we don’t have any other business. We are not in politics, we are not in real estate, we are not in industry, we are not in commerce, and so people can trust to deal with us.
A lot of people are bankers but bankers plus politics, commerce, etc. So, really, it’s like part of their conglomerate. Here, we don’t. Since the inception of the bank, we’ve always said that we have to keep to ourselves. People know that we are a professional bank.
Building trust and confidence to grow the bank
ED: Having said that, in a way that I assess a well-run retail bank, in terms of your branding, a lot of that has to do with your deposit market share. Lebanon is an amazing country where, when you talk about market share, it’s as fragmented as the kinds of people that there are in the country. How are you building that? How important is market share to you, and what do you need to overcome to build market share, especially deposit market share?
SA: If you look at Lebanon, we are number one in deposits. So, in market share, we have a leadership position, looking at Lebanon alone. The people trust us because they believe that the bank has an excellent record. It’s a safe bank. The ratios are the best ratios. And that’s why, even though we don’t pay the most on the deposits, they feel comfortable and they feel safe having a deposit with us. Plus, we have very good service. It’s very important. You can pay a bit less than the others, but when they are comfortable, you have a good service, you have a good branch network, and you have also good communication and information technology (IT) – that they can communicate through all types of channels – people are comfortable in dealing with us.
ED: Is that all there is, the reasons that you’ve just listed? It’s similar to a bank in the US and in Europe – they always have these things – but in Lebanon, a lot of the social structure is primordial. People are very conscious of the social groups and stuff like that. You seem to have transcended that. Is it something that you’ve achieved over time, rather than –
SA: Let’s put it this way. In terms of shareholding, in terms of general management, in terms of staff, we are representing all communities in Lebanon. We have some banks that are maybe concentrating on ownership and general management. In our case, we always have the idea that we have to be open, and our shareholding is open, and we have people on the board from all sects and all regions. So, we are very widely held, and the management is diversified, and the staff is diversified. This definitely gives us strength, that we are not perceived to be a bank that is strong only in one area. We are the strongest bank from the south to the north.
ED: Does that have a lot to do with the personality of your father? Is it something that he created over time?
SA: I think so, yes. Originally, when he entered the bank as a CEO, he made it a condition that he wanted to open the shareholding, that we needed to open the shareholding, and that we needed to have a diversified board and shareholders. So, that was an aim: If you want to be successful, you have to be present all over the country and to have a well-diversified bank.
ED: At the same time, your asset-liability ratio is still a little bit overleveraged in some ways. How are you dealing with that? Do you have capital requirements that you think you need to meet in order to grow further?
SA: Currently, our capital adequacy is 18%. It is the highest among other listed banks in Lebanon. So, we are very comfortable in terms of equity level. It is also surprising to have the highest capital adequacy and to have the highest return on equity. We don’t need to raise equity because of high-return equity, internally generated profit, which we are able to distribute to customers in every rank, increasing distribution to shareholders. At the same time, this profit that we retain is enough to grow our balance sheet. So, we are very comfortable in terms of equity, and we don’t have any capital constraints.
BLOM Bank’s footprint outside Lebanon
ED: And that’s on the background of a Lebanon which has had enough period of peace in order to see some growth in the economy, although it is right now in a very difficult position. Are there temptations that you’ve resisted, decisions that you’ve made, and businesses that you didn’t take on because you want to keep your franchise sustainable in growing the business? I ask this also because all of the key Lebanese banks have a very wide international network, and there’s a temptation to grow in countries like Turkey or the UAE or Egypt; to grow the footprint, and also to diversify the profit centres. What are you doing on that front, and are there decisions that you will not make because of your focus?
SA: Yes. First of all, our name, if you take it in English, is Bank of Lebanon and Overseas, and in fact, it used to be called Banque du Liban et d'Outre-Mer. Our original idea was to be present in Lebanon and abroad, so we like to have presence abroad. We believe there’s a big Lebanese diaspora. There are three or four million Lebanese here, and there are more than 50 million Lebanese living abroad. So, the idea was to have a presence abroad. And we have the biggest presence abroad in terms of distribution, in the number of countries that we are present.
Our decision to go to other countries is determined when we see that there is additional value for us – either in servicing our customer base or if we can become a strong local bank. We are present to service Lebanese and Arabs who go to Europe – Paris, London, and Geneva. We are present in Egypt, Jordan, Syria, and the Gulf because we believe we can become a strong local bank there, and we want to be a full-service local bank there.
We did not go into some other countries because we did not see any added value. You mentioned, for example, Turkey. I may have been the first person to study the market in Turkey but I decided that we were not going to Turkey; because, when I went to Turkey, I saw the big banks with 1,300 branches, strong IT, and a low cost of deposit because they have such a big network. So, first of all, there was high volatility in the market. Plus, if I am going there, you need the huge equity.
For a bank based in Lebanon, it is a high risk, and our logo is “Peace of mind.” I cannot find peace of mind in putting a big equity in a volatile market, and I don’t have any competitive advantage because it’s not like Egypt, Jordan, or the Gulf. Banks there are very competitive, with advanced IT and excellent marketing. Even though it would have given me the size, it would have affected the shareholders. Essentially, the ones that were there, we had similar earnings per share. Over seven or eight years, we have now doubled the earnings per share because the decision was that it would give them size… but it also affected the return for the shareholder.
ED: So, for a man who has never built his business on inorganic growth, what is so attractive about HSBC’s branch networking in Lebanon?
SA: I have to make a small adjustment to the statement. We bought the bank in Egypt. We never bought the bank in Lebanon. But we could not open in Egypt – there are no new licenses, so we bought a small bank in Egypt. So, we bought a very small bank in Egypt, a losing bank that now has become a profitable bank and a growing bank.
HSBC in Lebanon will probably be the first. Now, it’s open. We’re in negotiations with them, and we are the only bank now negotiating with them. Most probably, in the next few months, we will close the deal. We are awaiting all the approvals.
So, really, the idea is that HSBC is special in Lebanon because the activity of the bank is not like other banks in Lebanon. Other banks in Lebanon are mostly dealing with lending to the government. HSBC is mostly doing trade finance activity and retail banking, and its number of employees is limited. The real banking activity that they are doing is five times their size, compared to other banks in Lebanon.
It was an interesting opportunity, so that’s why maybe it was the only case that we pursued, and I think we will hopefully soon finalise it.
ED: With a limited number of staff and a franchise that you can control, you think that the integration part will be achievable? You’ve actually walked into the HSBC office, and looked at the people, and said, “Yes, we can integrate them.”
SA: Yes. Every year, we hire more than 200 employees, and their size is 200 employees, so it’s not a big size. They are well-trained employees, they have a good reputation, and as I said, they are doing a lot of activity. Their trade finance activity in Lebanon is almost the same size as ours, even though we have a portfolio which is ten times the size of their portfolio. So, they are very active with their portfolio.
ED: Did you chase them, or did they chase you?
SA: They were on the market. There were 14 banks, in the beginning, which were interested. We gave our credentials and what our vision was, and then they narrowed it to four banks, and finally, they decided that maybe the best –
ED: Is this something that you want to achieve?
SA: Yes. We believe that we can. Also, a lot of banks put conditions that they don’t want the staff or just limited staff. We said that we wanted all the staff. We want the full staff to stay. We are taking the bank because we believe they have good staff and they have good business. So, I think they felt that it’s easier, with the corporate culture of BLOM and what we are thinking, that we can use their staff. So, we are not going to diminish the number of staff here or there. It’s the opposite. We believe we can grow the business, and we can even take their help in some areas and grow our business. So, I think it will be a successful deal.
Having said that, a lot of times a merger and acquisition is done – unfortunately, I see it happening all the time – for the size. We are not doing it for the size. They have a small size. When people are buying a bank for prestige or for the size, I think it’s a wrong long-term decision. Unfortunately, I see it happening all the time, that mergers are being done either because they want to become bigger in the region or they want to be bigger in this country. This is not the right approach.
ED: So, you feel that you can absorb this merger. I have a question. The global banks have been retreating from a lot of different markets, especially in the areas of payments, transactions, and so on. How has that affected you, especially given that you have so many branches outside of the country? So, transaction banking would be an important part of your capability. How are you dealing with that, and have the US sanctions affected your business in any way?
SA: Let’s put it, first of all, in terms of sanctions. In Lebanon, we are very much a dollarised economy. We have an excellent relationship with our US correspondent banks. So, we have always been very careful –
ED: The Bank of New York is a shareholder.
SA: They issue GDR, so they are a shareholder, and they issue GDR as a trustee, yes. There are other shareholders, but they represent.
So, we have an excellent relationship – not only BLOM, I am speaking about the banking sector – with US banks because most of our balance sheet is in dollars, most of our transactions are in dollars, and we are very careful to make sure that they are comfortable in dealing with us. We have always known what US regulations are and made sure that we are applying those regulations when we are dealing with the US banks.
So, we apply all their sanctions and all their rules, and they are comfortable in dealing with us. A lot of times, people ask us, “How does Lebanon, with all the problems around with Iran, with Syria, have such a good relationship?” It’s because we are very careful. We are very careful and cautious to make sure that they are comfortable in dealing with us. So, we don’t have a problem in that sense.
Lebanon’s political situation and stability
ED: The final question really would be this. There was a time when Beirut was the Switzerland of the region, and today, places like Dubai and Qatar are competing to take that away. What do you see happening in Lebanon as a financial centre, and do you think it will recapture that role, or has it never lost that role because there is a very strong trust in the Lebanese banking system today? How do you think it will play out? For a bank like BLOM Bank, what do you see that will either take you on to your next level or make you an attractive acquisition target yourself in the near future?
SA: To be frank, the biggest problem we have is the situation in Lebanon. We are living in a country which is considered to be high risk, we are surrounded by instability, we have financial problems in Lebanon – the government has a big debt and a big deficit – and we have a low rating.
ED: It’s still investment grade, though, isn’t it?
SA: No, no, we are B-. So, really, it’s difficult in this environment to be a major financial centre in the region or worldwide, to be frank. We have excellent staff. We have excellent Lebanese bankers who are leading a lot of banks worldwide – in the Gulf, and in the US, and in London. You’ll find maybe more Lebanese bankers in London than in Lebanon, working in all areas of banking. But, frankly, in Lebanon, we have a problem with the government, in terms of rating and the situation in the country. The growth in Lebanon in the last few years, after the Syrian crisis, went down to a very low level, two percent growth.
Our only hope in the medium term is that there will be more stability in Lebanon – an improved political situation – and that Lebanon will improve its rating. We can definitely build on that and once again have a much more important role in the region.
ED: Thank you very much for speaking to me today, Mr. Saad. I find that the biggest asset in Lebanon is its people. In this conversation, I’ve tried to draw from you the essence of how you provide that leadership. I see a sense of strength, I see a sense of process, and the fact that you’ve been able to keep your franchise in a very difficult environment is an amazing achievement. Thank you very much for speaking to me.
SA: Thank you. Thank you for coming.
Building BLOM Bank as a leader in Lebanon
June 30, 2020
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