SLOW REFORMS, POLITICAL UNEASE: BANKS SEEK TO

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 000197

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LEBENSON
NSC FOR ABRAMS/DORAN/SINGH
EB/ESC/TFS FOR SALOOM

E.O. 12958: DECL: 01/18/2016
TAGS: EFIN ECON EINV SY
SUBJECT: SLOW REFORMS, POLITICAL UNEASE: BANKS SEEK TO
LIMIT THEIR RISK

REF: A. DMS 5285

B. DMS 6131

C. DMS 4977

D. DMS 0005

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d


1. (C) Summary: Syria's private banking sector continues to
expand modestly, with two new banks beginning operations and
the established banks opening new branches. However,
contacts report that the SARG's erratic pace of reform has
caused private banks to adopt conservative business plans
that limit their exposure to risk. In the near term, private
banks seem content to build market share in Syria's virgin
financial market in the expectation of future profits. End
summary.

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Banks Continue to Expand ...
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2. (SBU) Syria's private banking sector continues to grow,
with Lebanon-based Byblos Bank quietly beginning operations
in temporary facilities in December, and Jordan-based Arab
Bank opening its first branch in Damascus to great fanfare on
January 2, 2006. The two additions bring the total number of
private banks operating in Syria to six, while the banks
already in the market report that they are opening new
branches. Bank Audi Syria, which opened its first branch 80
days ago, is set to open its headquarters in downtown
Damascus before the end of January, and expects to open five
branch offices throughout Damascus by February. Bank BEMO
Saudi Fransi also has plans for physical expansion throughout
2006, projecting ten branches before the end of the year
including two in Idlib and Dar'a, outside of the major
metropolitan areas.


3. (SBU) In addition to new offices, all of the private banks
report a continued increase in the volume of deposits from
Syrian customers. Bank of Syria and Overseas (BSO),whose
parent company is the large Lebanese BLOM Bank, closed the
year with the equivalent of 21 billion Syrian pounds (SYP)
($382 million USD) in deposits, up from just over 12 billion
SYP in June 2005. Basel Hamwi, the General Manager of Bank
Audi Syria, stated that his bank was able to attract
approximately 1.5 billion SYP ($27 million USD) in deposits
in its first 80 days, which totals half of what BSO received
over its first year. Walid Abdel Nour, Executive General
Manager for Byblos Bank Syria, expects that his bank and
other new entrants will have a similar experience, since the
sector's current total capitalization of just over $300
million USD is insufficient to meet demand among Syrian
depositors.


4. (SBU) While all private banks lost money in 2004, some
realized modest profits in 2005 mostly through non-interest
revenue on the sale of Letters of Credit to importers,
Letters of Guarantee and Promissory Notes to borrowers, and
transaction fees on remittances. In addition, banks are
making a spread of 1.5% interest on their deposits
denominated in foreign currency that are invested in foreign
banks and mutual funds, and 4% on loans denominated in SYP.
According to George Sayegh, General Manager of BSO, his bank
reported a profit for the first time in 2005 of 155 million
SYP ($2.8 million USD),which equals a return on equity of
approximately 12%. (Note: According to contacts, the SARG
has loosened one of its restrictions on foreign exchange and
now allows banks to invest 100% of their deposits denominated
in foreign currency overseas. This represents a significant
source of revenue for BSO, for instance, which reported in
December that 64% of its deposits were denominated in foreign
currency, up from 35% in March. End note.)

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... While Limiting Exposure to Risk
--------------


5. (C) Contacts in the banking community complain, however,
that there remain significant institutional and regulatory
barriers that prohibit Syrian banks from realizing larger
profits (ref A). These contacts uniformly display a lack of

DAMASCUS 00000197 002 OF 002


confidence in the short-term prognosis for reform. Hamwi,
who also acts as an informal advisor on monetary issues to
Deputy Prime Minister for Economic Affairs, Abdallah Dardari,
stated that the momentum for reform has screeched to a halt
due to a combination of international pressure, rumors of a
cabinet shuffle and disagreements over priorities among the
various ministries. He added that while he is optimistic
that the SARG will pass a basket of reforms in the mid-term
(e.g. five years),he does not expect meaningful change over
the next two years.


6. (C) Other contacts state that the SARG's penchant for
often contradicting announcements of reform with regressive
action (ref B) is causing banks to adopt business plans that
are ultra-conservative. George Sayegh, whose total loans at
the end of 2005 accounted for only 18% of deposits, said that
BSO will maintain a low ratio of loans to deposits until
reforms solidify and Syria has a credit bureau to assess
risk, an insurance sector to provide credit insurance, and an
efficient judicial system to enforce contracts. A contact in
Bank Byblos Syria's upper management said that the bank had
planned to enter the market with a more aggressive strategy
to invest in longer-term initiatives, but adopted a
conservative business plan after entering the market because
of the SARG's often contradictory actions. Abdel Nour added
that Byblos is holding off plans to increase its capital to
$100 million USD until September 2006, when it can reassess
the economic and political situation. He continued that even
his customers are showing a lack of faith in the future of
the economy by refusing to make long-term deposits due to
lingering concerns that the SYP again will devalue
precipitously as it did in the fall of 2005 (ref C).


7. (SBU) Comment: The private banks in Syria have adopted a
long investment timeline. The banks' mostly Lebanese-based
parent companies know how to manage risk and are no strangers
to political instability, having made money during the
Lebanese civil war. They are attracted by the growth
potential in the Syrian market and are willing to endure
short-term losses in order to be in a position to profit in
the long-term. In this way, the Syrian private banks are
like the Gulf investors who are buying real property in Syria
now so that they are positioned to profit from Syria's
"virgin" tourist industry in the future (ref D).
SECHE