Moody’s released its outlook on Lebanon’s Banking system in late July in which it gave a negative view for the year 2015, despite some positive highlights. The banking system is mainly pressured by the deteriorating operating environment and the increased sovereign risk, although capital levels remain adequate and stability of assets is brought about by the larger depositor base. The report analyzed several key drivers which helped determine this analysis.
In terms of operating environment, Moody’s forecasts a weak economic growth of 2.5% in 2015 compared to 2% in 2014. Nevertheless, the report notes that “Lebanese Banks have a strong record of operating in a stressed environment.” Furthermore, some estimates on the real and external sector (such as tourism) are stabilizing, in addition to the positive impact from lower oil prices and the depreciating Euro.
Asset risk was also a concern, as banks’ credit exposure to Sovereign Lebanese bonds constitute a risk for the sector given the country’s rating (B2 negative) and the possible crowding out effect resulting from increased government financing needs.
However, capital levels at the Lebanese banks are on the up driven by the phasing in of Basel III requirements. The report considers the sector’s capital buffers to be sufficient but modest under the current case scenario. The banking system’s equity-to-total assets are forecasted to progress from 9% in 2014 to 9.5% in 2015.
Regarding the Lebanese banks’ profitability, it is expected to be under pressure due to low fee income generation and weak net interest income growth, as well as the higher collective loan-loss provisioning requirements, resulting from the deteriorating credit equality under the current economic conditions.
Despite that, the banking system stability will continue to be supported by the concrete liquidity buffers and the depositor-based funding noting that customer deposits constitute more than 80% of the system assets. In addition, remittance inflows (15%-20% of GDP) remain a large source of growth for banks’ deposits this year.
According to Moody’s, one large bump on the road for Lebanese Banks is the fact that financial support from the government could deteriorate, despite the latter’s strong interest in maintaining this support. The reasons are the large fiscal deficit (expected 8% of GDP for 2015) and the sectors high dollarization rate.
Moody’s Long-Term Foreign Bank Deposit Rating