Lebanon banking outlook remains negative, says Moody’s

The outlook for Lebanon's banking system remains negative, as it has been since 2011, Moody's Investors Service said in a new report, with expectations of weak economic growth adversely affected by the ongoing conflict in Syria as well as domestic political tensions; modest capital buffers; and, declining net profitability.
The Syrian conflict and factious domestic politics will continue to affect key sectors of the economy, including trade, tourism, real estate and construction, the rating agency said.
As a reflection of the challenging environment, Moody's expects that Lebanon will record muted credit growth in 2013 (of 8-10% nominally, vs. projected inflation of 5.7%), while the government's weak fiscal position implies that it will remain reliant on the domestic banking sector to finance its large fiscal deficit. Local banks' high exposure to Lebanese sovereign risk (B1 stable) — estimated at 42% of system assets in December 2012, or over 5x the system's Tier 1 capital — will remain a major source of credit risk for the banks.
Moody's also believes that the country's banks face a high likelihood of further asset-quality deterioration and that reported non-performing loans (NPLs) will rise above 6.5% of gross loans, from 4.4% in 2011. Over the outlook period, the main drivers of asset-quality deterioration will include regional instability (mainly in Syria), and Lebanese banks' operations in high-risk countries, primarily Egypt, Syria and Jordan.
The rating agency said that profitability will come under pressure due to rising credit charges, declining fee income generation and losses arising from Lebanese banks' operations in Syria.
Despite the material challenges, Moody's notes that the Lebanese banking system continues to benefit from solid liquidity buffers and depositor-based funding, which support the system's overall stability. Liquidity remains comfortable, with 'core' liquid assets amounting to 23% of total assets as at year-end 2012.
Moreover, Lebanese banks' reliance on market funding is minimal, as customer deposits, supported by remittances from the Lebanese diaspora, fund over 80% of system assets.