Political deadlock in Lebanon, accounting rules hit the finances of the Bank of Sharjah

Dubai: Bank of Sharjah has published preliminary profits in its operations in the United Arab Emirates, but remains in a consolidated net loss due to a political impasse, currency instability and a new accounting rule applied to its Lebanese subsidiary Emirates Lebanon Bank (EL Bank), Varouj Nerguizian, Group CEO of Bank of Sharjah, told Gulf News in an interview.

The bank’s Lebanese exposure is through its subsidiary Emirates Lebanon Bank. A very weak Lebanese operating environment, sovereign debt default in March 2020 and new accounting requirements added to the lender’s woes.

“Our problems in Lebanon are largely technical and are related to the political instability in the country and the totally unreasonable and illogical provisioning requirements imposed by IAS 29 (International Accounting Standards 29) with mandatory consideration of the impact of hyperinflation on the valuation of our assets,” Nerguizien said.

EL Bank’s asset base in Lebanon is largely made up of cash and investments in Banque du Liban (BoL, Lebanon’s central bank) at around 60%, and the rest is made up of corporate loans. As things stand, the duration of the BoL’s freezing of Lebanese banks’ foreign currency assets remains uncertain, given that they are used to finance the country’s import needs.

Nerguizian believes the crisis in the Lebanese banking sector can only be resolved by a stable government that can make tough decisions on the economy and the currency.

Varouj Nerguizian, Group CEO Bank of Sharjah

Crisis of confidence

“Lebanon is not a poor country. It has huge reserves of natural gas. A concrete plan to monetize these assets together with the floating of the currency can immediately change the course of the banking sector and the economy,” he said.

The prevalence of the dual exchange rate on the Lebanese pound, tight restrictions on the withdrawal of deposits and the conversion of dollar deposits into local currency at official exchange rates (which are significantly lower than parallel market rates) have eroded confidence investors in the Lebanese economy. and the banking system.

The official exchange rate is still 1,507 per dollar, while the currency changes hands on the parallel market in the range of 22,000 to 23,000.

Nerguizian believes that a monetary policy decision similar to Egypt’s could largely solve Lebanon’s financial problems. Earlier this month, Egypt devalued its currency by more than 16% and raised interest by 1%, paving the way for increased foreign investment.

“The floating of the Lebanese pound will automatically unify exchange rates and a one-time revaluation of assets. This will attract substantial foreign investment, improve the possibility of IMF-led public debt restructuring and financing, and see an increase in deposits from Lebanese expatriates,” Nerguizian said.

Strong recovery in the UAE

The standalone performance of Bank of Sharjah’s UAE operations was profitable in 2021.

The widespread economic recovery in the United Arab Emirates helped the bank make significant gains on its investment portfolio consisting of both real estate and equity portfolios.

“Some of our real estate and equity portfolios that suffered valuation losses as a result of the COVID crisis are now making significant gains on mark-to-market valuations,” Nerguizian said.

Funding needs

Extraordinary funding requirements have resulted in a significant decline in BOS capital ratios in recent years. A combination of weak internal capital generation and regulatory changes caused the capital adequacy ratio to drop to 11%, slightly above the minimum regulatory requirement of 10.5% under Basel 3 rules.

“Board and management are fully aware of the need to raise our capital and this will be done through an AT1 (additional tier 1 is bonds or some type of perpetual debt that banks use to increase their capital base and thus comply with Basel III standards) or a sale of shares to our existing shareholders.The modalities are being worked out,” said Nerguizian.

BOS’ funding profile and liquidity remain healthy and a concentrated customer deposit base provides the bulk of the bank’s funding. BOS complements its deposit funding with senior unsecured debt issuances.

What are IAS 29 hyperinflation provisions?

“IAS 29 Financial Reporting in Hyperinflationary Economies” requires that the financial statements of any entity operating in a hyperinflationary country present its accounts in the functional currency of that country reflecting the real purchasing power.

The standard lists factors that indicate an economy is hyperinflationary. One indicator of hyperinflation is when cumulative inflation over a three-year period approaches or exceeds 100%.

A possible agreement with the IMF raises hopes

A delegation from the International Monetary Fund will begin talks in Lebanon on March 29, Prime Minister Najib Mikati announced in Doha on Saturday.

The IMF-led bailout and debt restructuring is the country’s only option to pull its financial system and economy out of the current crisis. The Lebanese pound has lost more than 90% of its value since 2019, when the financial system collapsed, plunging the majority of Lebanese into poverty.

The massive pile of public debt (over 150% of GDP) needs to be addressed immediately to unlock banks’ foreign currency assets to make the banking system viable.

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