Ce­drus Bank: Seek­ing al­pha sta­tus

A new en­trant to Le­banon’s bank­ing sec­tor looks for rapid growth

Executive Magazine - - Contents -

For many years Le­banon’s na­tional tree, Ce­drus­libani, has been des­ig­nated a be­lea­guered species whose num­bers are lower than they should be. No such dan­ger has ever faced our coun­try’s pre­mium fi­nan­cial species: the Le­banese bank. If there was any ex­is­ten­tial prob­lem that our banks may have faced since na­tional in­de­pen­dence, it was over­pop­u­la­tion — too many bankers for a small coun­try.

But this month the Le­banese are pre­sented with the de­but of yet an­other com­mer­cial bank that vies for their de­posits — and this in­sti­tu­tion has bor­rowed its name from their na­tional sym­bol. “Ce­drus Bank will be spe­cial­ized in [serv­ing] com­mer­cial and re­tail clients. And we have an or­ganic growth strat­egy,” says Fadi As­sali, just hav­ing been elected chair– gen­eral manager of the new bank.

Ex­ec­u­tive vis­ited As­sali at Ce­drus In­vest Bank, a Beirut based wealth man­age­ment provider where he is co­founder and chief ex­ec­u­tive. It­self hardly four years old, Ce­drus In­vest op­er­ates un­der a spe­cial­ized bank­ing li­cense and is ma­jor­ity share­holder in Ce­drus Bank with an 85 per­cent stake. Par­tic­i­pat­ing in the new bank for the re­main­ing 15 per­cent stake is Ni­co­las Cham­mas, the head of Beirut Traders’ As­so­ci­a­tion. He will be board mem­ber and vice chair of the bank.

Although Ce­drus Bank is just ris­ing from the start­ing blocks, it is not a green­field estab­lish­ment. It en­ters the mar­ket with the ex­ist­ing branch net­work, sys­tems, as­set, de­posit and lend­ing port­fo­lios, and al­most all the em­ploy­ees of the Le­banon op­er­a­tion of Stan­dard Char­tered Bank. As Ex­ec­u­tive went to print, Ce­drus In­vest’s ac­qui­si­tion of Stan­dard Char­tered was set to close with a fi­nal shares trans­fer sched­uled for Fe­bru­ary 27. The Le­banese cen­tral bank had ap­proved the takeover in the last quar­ter of 2014.

As As­sali and Ce­drus In­vest co­founder Raed Khoury tell Ex­ec­u­tive, the ac­qui­si­tion equipped Ce­drus Bank with a client port­fo­lio of 12,000 ac­counts, 6,000 credit card re­la­tion­ships, as­sets and de­posits of about $90 mil­lion and $75 mil­lion, re­spec­tively, and a loan port­fo­lio “in the $50 mil­lions.”

“But the plan is to grow the busi­ness quite sub­stan­tially,” adds As­sali. To di­gest all as­pects of the ac­quired bank and pre­pare Ce­drus Bank for growth, “What we are do­ing now, [as a] first step, is rais­ing the eq­uity of the ac­quired bank to be around $60 mil­lion,” he says.

SHOOT­ING IN THE GREEN

The cur­rent eq­uity boost comes af­ter pre­vi­ous in­creases that saw Ce­drus In­vest’s cap­i­tal more than dou­ble from $52 mil­lion in 2011 to $110 mil­lion last year.

Ac­cord­ing to As­sali, the cap­i­tal in­crease in 2014 amounted to about $47 mil­lion be­cause the ini­tial cap­i­tal was al­ready boosted by re­tained earn­ings. The in­crease was sup­ported by all ex­ist­ing share­hold­ers, in­clud­ing

“CE­DRUS BANK WILL BE SPE­CIAL­IZED IN [SERV­ING] COM­MER­CIAL AND RE­TAIL CLIENTS. AND WE HAVE AN OR­GANIC GROWTH STRAT­EGY”

sev­eral prom­i­nent Saudi in­vestors, but also en­tailed the ad­di­tion of new share­hold­ers who were mainly Le­banese.

“Un­der an agree­ment with our his­tor­i­cal in­vestors, we wanted to in­tro­duce new blood to the struc­ture. So the cap­i­tal in­crease was done in a way whereby two thirds of new funds came from ex­ist­ing and one third from new in­vestors,” As­sali ex­plains. He ac­knowl­edges that the cap­i­tal in­crease di­luted the share­hold­ings by As­sali and Khoury “a lit­tle” from their ini­tial com­bined 8 per­cent shareholding.

TRACK­ING MANY DE­TAILS

Ac­cord­ing to As­sali, the con­fi­dence of Ce­drus In­vest share­hold­ers and man­age­ment in the ex­pan­sion was founded upon growth ex­pe­ri­ences of about 25 per­cent per an­num since 2011 in both as­sets un­der man­age­ment and prof­its. The plan for Ce­drus Bank is to reach prof­itabil­ity

af­ter two years of op­er­a­tions.

In lo­cal bank­ing his­tory, the launch an­nounce­ment of Ce­drus Bank on March 3 is ac­tu­ally the repa­tri­a­tion of this fi­nan­cial in­sti­tu­tion in a third life. It had been founded as an in­de­pen­dent lo­cal bank un­der the name Metropoli­tan Bank in 1979 and was ac­quired by Stan­dard Char­tered in 1998, mark­ing a rare in­vest­ment by a for­eign bank via takeover of an ex­ist­ing li­cense.

From Stan­dard Char­tered’s per­spec­tive, this in­vest­ment came at a time when the UK based in­sti­tu­tion — with spe­cial­iza­tion in emerg­ing mar­kets — was on a drive to ex­pand its global foot­print. Its de­ci­sion to di­vest of the Le­banese unit, which be­came public knowl­edge in the last quar­ter of 2013, was ap­par­ently trig­gered by un­der­per­for­mances of Stan­dard Char­tered in com­plex global en­deav­ors and im­por­tant Asian mar­kets, and was sold by the bank as a re­fo­cus on “pri­or­ity mar­kets” that en­tailed with­drawals from sev­eral coun­tries.

While As­sali would not con­firm how much Ce­drus In­vest spent on the ac­qui­si­tion be­cause of an agree­ment with Stan­dard Char­tered not to di­vulge the price, he ad­mits that the $24–27 mil­lion range quoted in lo­cal pa­pers was “not far off.” Stan­dard Char­tered did not com­ment on its sales de­ci­sion and fu­ture strat­egy for its Le­banon pres­ence when con­tacted by Ex­ec­u­tive on sev­eral oc­ca­sions.

As­sali ex­plains that Ce­drus In­vest is walk­ing away with Stan­dard Char­tered’s en­tire re­tail bank­ing op­er­a­tions as well as some pri­vate bank­ing clients, while Stan­dard Char­tered will main­tain a rep­re­sen­ta­tive of­fice in Beirut to ser­vice a small cor­po­rate port­fo­lio that it re­tained.

The takeover was a some­what drawn-out process, be­cause Stan­dard Char­tered had con­cerns over the fu­ture of the em­ploy­ees, and also be­cause of is­sues which As­sali de­scribes as “lo­gis­tics,” re­lated to the trans­ac­tion, such as us­age of Stan­dard Char­tered’s pro­pri­etary sys­tems dur­ing a tran­si­tion pe­riod. As­sali also notes the seller has paid par­tic­u­lar at­ten­tion to Ce­drus In­vest’s strat­egy go­ing for­ward and that both sides agreed on en­ter­tain­ing a postac­qui­si­tion re­la­tion­ship.

As the Ce­drus brand pre­vi­ously only stood for pri­vate bank­ing and wealth man­age­ment op­er­a­tions, their ven­ture into re­tail busi­ness con­sti­tutes not only an as­set ac­qui­si­tion, but also a tal­ent buy. As­sali claims they in­tend to keep about 85 per­cent of the ac­quired bank’s staff and se­lec­tively add new peo­ple where it did not have ca­pa­bil­i­ties, such as hous­ing fi­nance. By end of the year, Ce­drus Bank will have a head­count of 100 to 105, he says, com­pared with about 30 cur­rent em­ploy­ees at Ce­drus In­vest.

With an eye on the tough­en­ing of op­er­a­tional chal­lenges for Le­banese banks and bank­ing in gen­eral, Khoury ac­knowl­edges the pres­ence of “clear pres­sure” on bank­ing prof­itabil­ity in 2015, but ar­gues that Ce­drus Bank can take a long term ap­proach be­cause its share­hold­ers are not seek­ing quick re­turns. “We will be happy to grow our bal­ance sheet quickly in terms of mul­ti­ples which will be very high, but in terms of ab­so­lute [num­bers] we will

be build­ing our bal­ance sheet very slowly and can pick and choose our clients ac­cord­ing to risk con­di­tions be­cause we are start­ing from a small base,” he says.

More­over, he ar­gues, the tough times al­ready have proven for­tu­itous for Ce­drus. “All con­di­tions have a pos­i­tive and a neg­a­tive as­pect and be­cause the con­di­tions in the re­gion and in Le­banon rep­re­sented a higher risk for Stan­dard Char­tered than they were com­fort­able with, the op­por­tu­nity was cre­ated for us to step in. If con­di­tions in the re­gion would have been very good, they would not have thought of sell­ing or the price would have been much higher,” he says.

THE GOV­ER­NANCE PROPO­SI­TION

Ce­drus In­vest Bank and Ce­drus Bank will be run by two dif­fer­ent boards and op­er­ate as sep­a­rate en­ti­ties ded­i­cated to com­mer­cial and re­tail busi­ness at the lat­ter and in­vest­ment and pri­vate bank­ing ser­vices at the for­mer. As­sali says, “The pri­vate bank­ing arm is the Ce­drus In­vest Bank, so we have a very clear sep­a­ra­tion be­tween the lines of busi­nesses and the way they are run. But with com­plete syn­ergy; [it will be] sep­a­ra­tion with syn­ergy.”

Ac­cord­ing to him, the as­sets-un­der-man­age­ment port­fo­lio at Ce­drus In­vest, plus a small ad­di­tion of pri­vate bank­ing busi­ness via the ac­qui­si­tion, has ex­panded to be­ing cur­rently “very close to $500 mil­lion.”

The cur­rent Ce­drus In­vest board that was elected in 2014 for a three year term in­cludes co­founders As­sali and Khoury, with the lat­ter hold­ing the po­si­tion of chair–gen­eral manager, plus three share­hold­ers as non ex­ec­u­tive mem­bers and two or three in­de­pen­dent mem­bers, among them Ghassan Ay­ache, a for­mer vice gover­nor of the cen­tral bank and pre­vi­ous chair of Ce­drus In­vest Bank.

The board of Ce­drus Bank is start­ing out with five mem­bers headed by As­sali as chair and by mi­nor­ity share­holder Cham­mas as vice chair, As­sali says, and will be ex­panded very soon by adding at least one new mem­ber.

It is not in­tended for the group to stay at this stage for a very long time. While Ce­drus Bank is start­ing out with three ex­ist­ing branches pre­vi­ously run un­der the Stan­dard Char­tered brand, the plan is to quickly uti­lize two ad­di­tional ex­ist­ing branch li­censes that had be­come dis­used. In the short term, the bank aims to have two to three new branches run­ning within 18 months.

The or­ganic growth strat­egy will in­volve fur­ther de­vel­op­ing their re­tail bank­ing ser­vices, be­gin­ning with new de­liv­ery chan­nels and in­clud­ing a ros­ter of new credit card and lend­ing of­fer­ings fo­cus­ing on what As­sali dubs the “mid­dle mar­ket” clien­tele. “We see a need for that niche of mar­ket to be well served,” he says.

Re­flect­ing the im­por­tance of ex­panded hu­man ad­vi­sory and au­to­mated ser­vice points such as elec­tronic branches, the largest in­vest­ment bud­gets of the roll­out and re­fur­bish­ing of the branches will be al­lo­cated to tech­nol­ogy and hu­man re­sources. The tech­nol­ogy bud­get on its own will sur­pass $1.5 mil­lion per year for the next two years.

STRATE­GIZ­ING FOR MUCH MORE

In the medium to long term, how­ever, Ce­drus Bank is in­tended by both its in­vestors and ex­ec­u­tive man­age­ment to be­come a player that can ben­e­fit from the economies of scale re­quired to make a mark in Le­banon’s bank­ing sec­tor.

Over the com­ing five to six years, the young Ce­drus Bank thus en­vi­sions ex­pan­sions that could well go be­yond or­ganic into what As­sali calls grow­ing “or­gan­i­cally and op­por­tunis­ti­cally–in­or­gan­i­cally.” This, he adds, is “be­cause in com­mer­cial bank­ing, size mat­ters. And you have to have a cer­tain size in or­der to be able to com­pete.”

Ul­ti­mately then, As­sali and Khoury aim at join­ing the top of the size league, the al­pha group of banks which hold cus­tomer de­posits of above $2 bil­lion by cur­rent reckoning. As Khoury in­sists, how­ever, “we are not ob­sessed with be­ing al­pha or beta. Al­pha is not a tar­get by it­self but will be [a] nat­u­ral con­se­quence of what we want to do.”

While the two de­clined to di­vulge any spe­cific plans for fu­ture merg­ers and ac­qui­si­tions, both

“IN TERMS OF AB­SO­LUTE [NUM­BERS] WE WILL BE BUILD­ING OUR BAL­ANCE SHEET VERY SLOWLY AND CAN PICK AND CHOOSE OUR CLIENTS AC­CORD­ING TO RISK CON­DI­TIONS”

con­firm that the new bank will need in­or­ganic growth to achieve such di­men­sions. Cit­ing lower val­u­a­tions ex­pe­ri­enced by lo­cal banks when com­pared with 10 years ago, Khoury sees three rea­sons for new takeover op­por­tu­ni­ties to arise. “We feel that there is a fu­ture pos­si­bil­ity of banks be­ing sold be­cause they are not able to main­tain a good [in­ter­nal rate of re­turn]. Next, the cen­tral bank pro­mot­ing merg­ers and ac­qui­si­tions and third, many bank own­ers are no longer young and face suc­ces­sion is­sues so some might be in­ter­ested in sell­ing,” he says.

Not­ing th­ese am­bi­tions, and evolv­ing con­di­tions for the bank­ing in­dus­try, it ap­pears quite pos­si­ble that the en­try of Ce­drus Bank into the mar­ket could be­come a fac­tor in sec­tor con­sol­i­da­tion rather than adding just a new brand for cor­po­rate and re­tail bank­ing.

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