Apr 23, 2013
Limassol, April 18th 2013 - The outlook for Lebanon's banking system remains negative, as it has been since 2011, says Moody's Investors Service in a new report recently published. The outlook reflects the rating agency's expectations of (1) weak economic growth in Lebanon, which continues to be adversely affected by the ongoing conflict in Syria as well as domestic political tensions; (2) modest capital buffers,considering the banks' high exposures to the low-rated Lebanese sovereign and the high likelihood of further asset-quality deterioration; and (3) declining net profitability, primarily due to higher provisioning needs and subdued business generation.
The new report, entitled "Banking System Outlook: Lebanon", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.
The ongoing conflict in Syria and factious domestic politics will continue to adversely affect key sectors of the Lebanese economy over the 12- to 18-month outlook period, including trade, tourism, real estate and construction. As a reflection of the challenging environment, Moody's expects that Lebanon will record muted credit growth in 2013 (of 8%-10% nominally, against projected inflation of 5.7%), while the government's weak fiscal position implies that it will remain reliant on the domestic banking sector to finance its large fiscal deficit. Lebanese banks' high exposure to Lebanese sovereign risk (B1 stable) -- estimated at 42% of system assets in December 2012 (when including investments in the Lebanese central bank's certificates of deposits), or over 5x the system's Tier 1 capital [Source: central bank of Lebanon] -- will remain a major source of credit risk for the banks.
Moody's also believes that the country's banks face a high likelihood of further asset-quality deterioration and that reported non-performing loans (NPLs) in the system will rise above 6.5% of gross loans, from 4.4% in 2011. Furthermore, the rating agency considers that classification rules in Lebanon exhibit weakness and that reported NPL figures understate the extent of asset quality pressure. Over the outlook period, the main drivers of asset-quality deterioration will include (1) regional instability (mainly in Syria), which weighs on domestic operating conditions, and in turn adversely affects tourist flows, real-estate activity and consumer confidence; and (2) Lebanese banks' operations in high-risk countries, primarily Egypt, Syria and Jordan.
Moody's says that profitability will come under pressure due to rising credit charges, declining fee income generation, and losses arising from Lebanese banks' operations in Syria. The decline in profitability over the outlook horizon could be more pronounced if domestic or regional political conditions deteriorate sharply.
Despite the material challenges, Moody's notes that the Lebanese banking system continues to benefit from solid liquidity buffers and depositor-based funding, which support the system's overall stability. Liquidity remains comfortable, with 'core' liquid assets -- i.e., cash, placements with the central bank and placements predominantly with international banks -- amounting to 23% of total assets as at year-end 2012. Moreover, Lebanese banks' reliance on market funding is minimal, as customer deposits, supported by remittances from the Lebanese diaspora, fund over 80% of system assets.
Re-disseminated by The Asian Banker