Moody’s outlook of Lebanese banks stable on growth

Moody’s has rated Lebanon’s banking system outlook as stable on expectations of modest economic growth and inflows of foreign deposits, helping the country’s banks to finance the government.

Domestic credit will grow slightly at 2 to 3 per cent over the next 12 to 18 months as interest rates rise, the credit agency said in a report on Tuesday. Any significant slowdown in deposit inflows would challenge banks’ ability to finance the government and is the main risk to the stable outlook.

“Lebanese banks will continue to attract the needed inflows of customer deposits, much of this from the Lebanese diaspora,” the report said. “Deposits should grow 5 to 6 per cent over the outlook period.”

Lebanon’s economy has been battered by political divisions and a six-year war in neighbouring Syria during which an influx of refugees stretched the country’s public finances and infrastructure. The tiny nation also has one of the world’s highest ratios of debt to gross domestic product, standing at more than 150 per cent.

Last month, the International Monetary Fund urged Lebanon to take immediate action to improve the sustainability of its public debt by increasing VAT rates, restraining public wages and gradually eliminating electricity subsidies.

Profitability of Lebanese banks will take a hit from subdued business activity, higher provisions costs from low levels in 2017 and higher taxes, Moody’s said. Banks will post a net income to tangible assets of about 1 per cent over the next 12 to 18 months, which is below the 1.2 per cent average recorded last year.

The credit agency said Lebanon’s economy grew 1.9 per cent in 2017 and forecast a “modest” rise in GDP growth of 2.5 per cent this year and 3 per cent next year. This outlook is based on expectations of greater economic policy co-ordination and that the government will resume long-delayed public investment projects.

Exposure of country’s lenders to sovereign debt will grow, which will increase their financial risks.

“Large fiscal deficits of about 8 per cent this year and next will again be financed by the banks,” Moody’s said.

Sovereign exposure made up about half of banks’ total assets last year, linking their creditworthiness with the heavily indebted Lebanese government and exposing them to liquidity risks.

Moody’s rates Lebanon at B3 with a stable outlook.