Dubai: Domestic and regional political upheavals and slow economic growth are expected to curtail Lebanon’s banking sector asset growth and profitability, according to analysts.
The key source of risk for Lebanese banks remains their huge exposure to the sovereign. “Domestic banks continue to use large and resilient, albeit slowing, deposit inflows to buy the debt the domestic government issues to finance its structurally high deficits, in turn inflating the banks’ balance sheets and effectively exposing them to a single large borrower,” Paul-Henri M. Pruvost, an analyst with credit rating agency Standard & Poor’s, said.
Despite the multi-level crises faced by the economy and the banking system, analysts say the banks are capable of withstanding the deteriorating quality of private sector loans.
“In Lebanon, everything is subject to collapse or setback, with the exception of the banking sector. 2013 was the worst year for the country. We had the resigned cabinet, the failure to form a new government, the tense security situation in the region, which affected Lebanon, and yet the banks achieved growth in deposits and loans,” Joseph Torbey, president of the World Union of Arab Bankers, said.
Lebanon’s adequate banking supervision and favourable interest rates have sustained depositors’ confidence. Funding features a high proportion of retail deposits that have shown resilience through various past crises. Deteriorating public finances and poor growth prospects are increasing the burden banks face by relying on funds from the Lebanese diaspora to source foreign currency inflows.
Funding risks rise
Analysts say funding risks of the banking sector have heightened. “We believe these risks will remain significant in the near future. Our concerns related to deposit-sourcing are becoming more acute because geopolitical risks have been elevating as financing needs from the government have increased due to poor economic prospects,” Sergey Voronenko, an analyst with S&P, said.
High indebtedness of the government has limited its ability to support the banking system. “Deteriorating operating conditions have eroded the sovereign’s creditworthiness, casting doubt on its ability to provide extraordinary support to the banking sector in case of a systemic crisis. Against the weak economic backdrop, banks’ exposure to the structurally highly indebted domestic sovereign dominates their asset portfolios. We continue to see a high risk linked to this exposure, especially because domestic public finances are deteriorating,” Voronenko said.
Since the Syrian crisis began in early 2011, Lebanon’s economic fundamentals have slowly but steadily deteriorated and the economic growth is expected to be around 2 per cent this year. The spillovers from the war in Syria are dampening performances of key sectors, such as tourism, and have pushed up cost of risk at the largest Lebanese banks that had extended operations abroad since 2007. Longstanding political bickering between sectarian factions is consistently obstructing economic and fiscal policy and decision-making, curbing economic growth potential and lending opportunities for banks.
“We expect political turmoil to keep growth of credit to the private sector at about 10 per cent over 2014-2015, primarily owing to trade and services, internal consumption and real estate-related lending,” Pruvost said.
