Lebanese banks ride high on domestic loan boom

Dubai: Bank lending in Lebanon has been booming with a major share of loans going to the corporate sector, according to the latest statistics on loans and deposits published by Bank Audi, a universal bank operating in Lebanon.

Bank loans, consisting of loans to the Lebanese and regional corporate sector booked in Lebanon grew by $3.1 billion (Dh11.3 billion) or 10.8 per cent during the first five months of the year, which is about 3.8 times higher than the average growth recorded over the past eight years. Meanwhile, this growth was almost three times the growth of $1 billion witnessed in the same period of 2008.

The consolidated assets of banks operating in Lebanon grew by $5.4 billion, or 4.7 per cent in the first five months of 2010, moving from $115.3 billion at end-December 2009 to $120.7 billion at end-May 2010, an increase of 26.5 per cent, two times higher than the average growth recorded over the previous eight years.

According to the Bank Audi's Weekly Monitor lending activity continued along the same upward trend witnessed since the beginning of the year. Bank loans moved from $28.4 billion at end-December 2009 to $31.4 billion last May.

Lending activity

While loans in Lebanese pounds grew by $981 million between December 2009 and May 2010, around 2.8 times the growth seen during last year's corresponding period, foreign currency loans continued to drive lending activity in Lebanon, accounting for 68 per cent of total loan growth during the first five months of the year.

While the loan growth to the private sector has been helping the fast recovery of key sectors of the economy such as tourism and property development, the International Monetary Fund has recently cautioned that risks could emerge in the real estate sector if property prices and credit availability continued to rise rapidly.

"While prudential standards for housing and real estate lending are conservative and bank exposure to these sectors is limited, care should be taken that the recent price surge and accelerating credit growth do not feed off each other to produce a real estate bubble," the report said.

Andreas Bauer, the IMF's mission chief for Lebanon, said it is vital to address these vulnerabilities, suggesting that the government look at measures to take some of the heat out of the property sector.

"If credit growth accelerates further, the authorities should consider capping and gradually phasing out incentive schemes that provide exemptions to reserve requirements," he said.

Excess liquidity

Lebanon's central bank insists that it has been cautious about the loan expansion. "Clearly the excess liquidity can push up inflation. Thus we have been mopping up liquidity through certificates of deposit (CDs) on one hand and has been encouraging lending only to productive sectors," Read H. Charafeddine, first vice-governor of Banque du Liban told Gulf News.

"As far as loans to productive sectors, we do provide incentives to banks to lend. We offer concessions in statutory liquidity requirements (SLR) if we are satisfied the loans are given to productive sectors," he said.

In Lebanon banks are required to keep 15 per cent of their deposits with the central bank. The central bank frees up this on the merit of the lending activity.

The rising liquidity levels in the banking system have been the main reason for the surge in the lending activity.

Overall, customer deposits grew by $3.4 billion, or 3.6 per cent during the first five months of the year surging from $95.8 billion at end-December 2009 to $99.2 billion at end-May 2010. The year 2009 saw an exceptional growth in deposits triggered by capital flight into the Lebanese banking system, which was seen as a safe haven during the global financial crisis.

The analysis of customer deposits by type shows that the increase during the first five months of this year is attributed to Lebanese residents, whose deposits at Lebanese banks rose by $3.6 billion. In 2007, the percentage of deposits denominated in foreign currency was more than 77 per cent, and the total deposits accounted for about $60 billion.

Currently the share of total foreign currency deposits is down to 60 per cent.

Dubai Lebanon's real estate sector, like the economy in general, is enjoying a surge, with record levels of sales and high returns for investors. However, there are concerns that the property growth could become too much of a good thing, with the rapid increases becoming unsustainable and a correction on the way.

According to figures released by the Directorate of Real Estate in mid-June, there was a 41 per cent increase in property sales in the first quarter of the year compared to the opening three months of 2009.

In total, the 22,000 property transactions conducted throughout the quarter had a value of $2.1 billion (Dh7.7 billion), a new record.

Combined with lower interest rates and an easing of loan restrictions by local lenders and state housing assistance schemes, the real estate sector asset prices are hitting new highs.

While most of the sector is still attracting investors, there have been some cautious notes being struck over the property boom.