BEIRUT Syria's civil war has shrunk the operations of Lebanese bank affiliates operating there, but the parent banks are coping with the damage thanks to careful provisioning, a senior Lebanese banker said.
Saad Azhari, general manager of Blom Bank (BLOM.BY), one of Lebanon's biggest lenders, said deposits at his bank's Syrian subsidiary BSO had plunged to $700 million from $1.8 billion at the beginning of last year, before the uprising began.
Blom's loan portfolio in Syria has dwindled to $210 million from $670 million.
"The banks in Lebanon that have operations or have affiliates in Syria - the size of their Syria affiliates has diminished sharply," Azhari said at the Reuters Middle East Investment Summit.
But he added that the banks had set aside large provisions for bad loans in Syria. So far, many loans there have been paid back, so there is even a chance that the banks could write back some provisions in future, boosting their profits, he said.
"There was a very prudent policy taken by Lebanese banks that are operating in Syria: they took major provisions, at the advice of the (Lebanese) central bank," Azhari said.
"Until now most of the lending has been paid back. If we don't need the provisions, we will release them and they will become profits."
At least seven Lebanese banks opened operations in Syria after President Bashar al-Assad began liberalizing the economy when he came to power 12 years ago. Syria became a small but significant part of their business.
The impact of the Syrian turmoil on Lebanese banks will start to decline next year, said Azhari, whose bank's assets totaled $24.4 billion at the end of September.
"I have to say the operation in Syria now constitutes a very small part of our consolidated balance sheet, because it went down," he said. "Syria in terms of importance to the balance sheet used to be the number two country - now it is nearly number four."
In addition to the blow to their Syrian operations, Lebanese banks face a domestic economic slowdown, which is partly due to the impact on trade and tourism of the turmoil in Syria.
After growing by about 7-9 percent annually for four years, Lebanon's economy expanded just 1.5 percent last year, according to the International Monetary Fund. The government projects around 2 percent growth this year.
Credit rating agency Moody's Investors Service said last month that the outlook for Lebanese banks remained negative because of weak economic growth and poor business sentiment due to the war in Syria.
Moody's predicted that non-performing loans in Lebanon would eventually grow to 6.5 percent of gross loans from 4.0 percent at the end of 2011.
However, Azhari said he still expected Lebanese bank deposits to grow by around 7 to 8 percent this year and loans by about 10 percent. Growth levels next year will be similar if the geopolitical situation in the region does not change, he added.
Blom, which is present in 12 countries across the Middle East and Europe, is therefore looking to expand its branch network in Lebanon and the region in 2013, and even open in new countries, Azhari said without naming the countries.
"Blom and the Lebanese banks are extremely liquid and we are used to instability, and we can manage much better than other banks when there is instability," he said.
"So I think we are looking at 2013 positively, and we will continue to grow."
In the first nine months of 2012, Blom's net profit rose 6.1 percent from a year ago to $250.7 million. It recorded $75.5 million of net loan provisions in the period.
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(Editing by Andrew Torchia and Tom Pfeiffer)