Moody's reports: Stable outlook for Lebanese banking system

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The credit outlook for the Lebanese banking sector is stable, reflecting the buoyant performance of the local economy in 2009, improvement in Lebanese politics and relative stability in the region, says Moody's Investors Service in its new Banking System Outlook on Lebanon. However, this outlook could weaken rapidly in the event that the recent political posturing in the wider region deteriorates into more serious acts of aggression.

Moody's stable outlook for the Lebanese banking system expresses the rating agency's view on the likely future direction of fundamental credit conditions in the industry over the next 12 to 18 months. It does not represent a projection of rating upgrades versus downgrades.

"The stability of the Lebanese banking sector reflects, to a significant extent, its remarkable success in attracting a constant large stream of foreign funding from the Lebanese diaspora and Gulf investors. Indeed, bank deposits have displayed a notable resilience to political shock throughout the country's turbulent recent history," says Stathis Kyriakides, a Moody's Assistant Vice President-Analyst, and author of the report. At the same time, given the systemic risks inherent in operating within Lebanon's volatile operating environment, Lebanese banks have traditionally maintained high liquidity, much of it with international financial institutions.

Moody's does not anticipate either a significant overhaul in Lebanese banks' liquidity policies or any short-term impediments to the stable inflow of foreign funding in the absence of a significant deterioration in regional politics.

Meanwhile, the buoyant performance of the economy in 2009 and expectations of good growth in 2010 together with a relatively stable domestic political scene (within the Lebanese context) are supportive of credit conditions in the country. That said, a key feature of the Lebanese banking system is the banks' sizeable exposure to sovereign debt, which -- given Lebanon's B2 sovereign rating -- constitutes a highly risky investment. "Banking and government finances remain co-dependent in Lebanon: the government relies on ongoing financing of its sizeable debt by domestic banks and the banking sector has embedded interest in preserving monetary stability. Thus, government securities will continue to comprise a large portion of banking assets in the foreseeable future, linking banks' asset quality to the performance of the government's debt rating," Mr Kyriakides explains.

Domestic and regional politics have a more pronounced impact on Lebanon's economy, sovereign debt rating and banking system than global economic conditions. In this context, Moody's cautions that, despite its current stable credit outlook for the Lebanese banking sector amid the recent relative stability, political risk remains high for as long as the country continues to be the theatre for proxy conflicts among regional and international stakeholders in the region.