Moody’s Investors Service, released on May 22 2019 a Sector Comment titled “Participation in Lebanon’s 1% coupon T-bill will pressure banks’ profitability, without curing sovereign woes” in which it evaluates the MOF decision to issue treasury bills (T-bill) of up to LBP11 trillion ($7.29B) with a 1% coupon rate in coordination with the BDL and commercial banks after the 2019 state budget approving. The step came amid the Lebanese Government effort to reduce fiscal debt and unblock the CEDRE related funds. In fact, the low coupon issuance would cut Lebanon’s debt servicing costs by up to LBP1 trillion ($663M) per year representing 1% of GDP annually, without changing Lebanon’s debt trajectory.
The study reveals the possible negative impact on the commercial banks in case they participate knowing the difficult economic situation and increase in taxes. In details, the banks’ net interest margins are already pressured as the average cost of Lebanese pound deposits was 8.75% as of March 2019, up from 6.64% the same period last year. In addition, the Return on average assets for alpha banks and return on average equity (RoAE) fell from 1.05% and 11.26% in 2017 to 0.91% and 10.31%, respectively in 2018. Moreover, in its new budget which is being currently discussed, the Lebanese government decided to raise a tax on interest income to 10% from 7% for three years.
However, the agency still encourages the commercial banks participation instead of the BDL. In fact, the latter subscription could “monetize the deficit, stoke inflation pressures and further pressure domestic borrowing costs”. Additionally, Lebanon’s access to the $11B from CEDRE conference will support the economic activity, raise the new deposit inflows and lower therefore the risk premiums that banks pay for deposits. This would increase the banks’ profitability from 2020 onwards.