Amid frequent predictions of Lebanese banking’s imminent demise, nearly all of which have been challenged by the sector’s defiantly resilient performance in the past, both at home as well as broad, yet another grim outlook comes from Moody’s rating agency.
Data and research prepared by The Middle East in Europe suggests Lebanese banking has deep financial links in Europe, particularly in London and Paris, but also in other financial centres within and outside the European Union, including Russia and the former USSR, as well as the Maghreb and sub-Saharan Africa.
A Moody’s report (published 30 July 2015) says that despite signs of stabilisation in Lebanon’s economy — including a slight rebound in tourism and a net positive impact from low oil prices and the depreciation of the euro — the subdued operating environment will continue to weigh on Lebanese banks’ performance over the next 12-18 months.
As a result, the rating agency said, its outlook on Lebanon’s banking system remains negative.
“This outlook expresses our expectation of how bank creditworthiness will evolve in the system over the next 12-18 months and does not announce any credit rating action,” Moody’s said.
“We expect Lebanese banks’ operating environment to remain weak. Credit exposure to the weakened Lebanese sovereign, as well as dampened profitability, remain key challenges,” Moody’s quoted its own Alexios Philippides, the agency’s lead analyst for Lebanese banks.
Key points raised by Moody’s which European investors in Lebanon will do well to note:
- Lebanese banks’ high and growing exposure to the Lebanese sovereign (B2 negative) will remain a major source of credit risk over the outlook period. We estimate that, as of April 2015, direct exposure to Lebanese sovereign debt was equivalent to 2.6 times banks’ Tier 1 capital.
- Moody’s forecasts real GDP growth of 2.5% in 2015 (2014: 2.0%), well below the 9% average for 2007-10.
- Moody’s expects the budget deficit to remain high at 8% of GDP for 2015, with the government relying on the domestic banking sector for financing, hence we expect subdued business generation, with lending growth below 5%, mainly driven by the central bank’s economic stimulus package, significantly below the 24% average annual credit growth seen during 2007-10.
- Moody’s expects specific loan-loss provision expenses to remain elevated at over 1% of gross loans for the year and non-performing loans (NPLs) over 5% of gross loans, from our estimate of 4% at end-2014 for rated banks.
- Capital levels will continue to improve, driven by the phasing-in of Basel III rules. We expect system equity-to-total assets of 9.5% as of end-2015 (from 9.0% at end-2014).
- Nevertheless, despite the challenging conditions, Moody’s expects Lebanese banks to continue to grow their stable deposit funding bases over the outlook period. Customer deposits represent more than 80% of system liabilities, and are supported by inflows of remittances from the Lebanese diaspora, which is equivalent to 15%-20% of GDP on an annual basis.