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Lebanon - Stable Banking System Powered by Buoyant Economic Performance

Global Arab Network - - George Haddad

Wednesday, 23 June 2010 21:59

Lebanon - Stable Banking System Powered by Buoyant Economic Performance

According to Anouar Hassoune, VP-Senior Credit Officer at Moody’s, the outlook for the Lebanese banking system is stable. This reflects expectations that the buoyant performance of the local economy in 2009 will be followed by good, albeit slower, growth in 2010, as well as relatively improved domestic political conditions. However, the outlook could weaken rapidly if the recent political posturing in the wider region deteriorates into more serious acts of aggression.

This takes into account the buoyant performance of the local economy in 2009, which bucked the trend of the global economic recession. Overall, domestic and regional politics have a more pronounced impact on the local economy and banking system than global economic conditions and, thus, the stable outlook reflects the relative improvement in Lebanese politics and relative stability in the region.

That said, the outlook could weaken sharply if recent political posturing in the wider region were to be allowed to deteriorate into more serious acts of aggression. Lebanon’s political risk remains high for as long as the country continues to be the theatre for proxy conflicts among regional and international stakeholders in the region.

Since the second half of 2008, the Lebanese banking sector’s performance has defied global trends to record good growth and progress. Not only were Lebanese banks not exposed to US sub-prime risk or failed Western banks, but ample liquidity also shielded them from the troubles of the global credit crisis. This traditionally high level of liquidity is a response to the systemic risks inherent in Lebanon’s volatile operating environment and results in the banks being general net placers of funds in the global credit markets. In addition, Lebanese banks’ deposit growth remained buoyant, partly thanks to their extensive – and relatively stable – funding from the country’s diaspora, which forms the bedrock of the local banking system.

A key feature of the Lebanese banking system is the banks’ sizeable exposure to sovereign debt (multiple times their equity), which – given Lebanon’s B2 sovereign rating – constitutes a highly risky investment and raises their risk profiles. Government securities, which are set to remain a large component of the banks’ balance sheets, represent their largest source of credit risk concentration.

In addition, despite the improvement in credit conditions and declining non-performing loan ratios, the buoyant loan growth (of 15%) during 2009 is not without risk, particularly in view of the private sector’s leverage. That said, given the weight of sovereign exposure on Lebanese banks’ balance sheets, their asset quality is impacted more by the evolution of Lebanon’s debt rating.

Although banks reported an increase in net profits during 2009 (partly due to better investment income), net interest margins have been under pressure. More stable operating environment conditions have encouraged customers to take advantage of the interest rate deferential between the dollar-pegged Lebanese pound and the US dollar. Consequently, the dollarisation of deposits has been declining (with a shift towards higher interest-bearing local currency deposits) while loan dollarisation has remained relatively stable. Lebanese banks’ modest profitability metrics reflect the fact that a large proportion of their balance sheets remain invested in lower-yielding liquid assets. Going forward, the high exposure to government securities will continue to constrain the banks’ capacity to diversify revenue sources. The larger banks’ still moderate regional operations provide some potential for diversification, however.

Global Arab Network

Extracted from report of Mr Anouar Hassoune, VP-Senior Credit Officer at Moody’s

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