Lebanese lenders face toughest test at home

Lebanon’s economic crisis is a litmus test for the resilience and domestic support of its banks as well as their potential for sparking contagion abroad. Lebanese lenders remained closed for a seventh working day on Friday, with the small, heavily indebted Mediterranean country paralysed as hundreds of thousands of people protest over economic strife, leaving schools and businesses shut. The government has responded by promising reforms which involve banks stumping up 5.1 trillion Lebanese pounds ($3.4 billion) towards deficit reduction in next year’s budget, partly through a rise in tax on their profits.

“These measures should weaken the banking sector as they will cut into their profit margins over the next year,” said Natasha Smirnova, portfolio manager at Pinebridge Investments, pointing out the levy was just a one off for next year.

Financial services make up 8 per cent of gross domestic product in the country of 6 million. Bank deposits to GDP stand at 243 per cent, the third highest ratio globally after Luxembourg and Hong Kong. “Banks have an enormous role in government funding, as they are almost their only source of financing, and the cabinet/ central bank will proceed with utmost caution so they do not hurt the sector too much,” Smirnova added.

Lebanon’s unorthodox “financial engineering” relies on them drawing in FX deposits from abroad by offering high interest rates to help shore up the country’s pressurised FX reserves.

Lebanon has 66 registered lenders, with commercial banks holding just over $260 billion of assets, central bank data showed, though a handful of large players dominate. But while banks in Lebanon have an unusually wide geographic spread due to its estimated diaspora of around 14 million, their closure so far appears to pose relatively little threat to wider financial stability.

The Lebanese have a long history of emigration and settling around the world, with large, mostly Christian, expatriate populations in Brazil and the United States in addition to communities in Africa.

“Lebanese banks have significant operations in the region, but this is mainly through a subsidiary model, where those operations are ring-fenced,” said Farouk Soussa, senior economist with Goldman Sachs. “This minimises the risk of financial contagion either way.”