The financial strength ratings (FSRs) of rated Lebanese banks continue to be constrained by the difficult, albeit slightly improving, operating environment in Lebanon, reported Moody's Investors Service in a new Banking System Outlook on Lebanon.
The banks’ exposure to a government whose own credit standing is severely strained by its onerous debt and debt-servicing burden remains the key rating driver for Lebanese banks. Over the past few years, slow economic growth has negatively affected the Lebanese corporate sectors and with it the asset quality of banks.
“Maintaining stability in asset quality will continue to represent an important challenge for banks in the medium-term,” says Adel Satel, a Moody’s vice president, senior analyst and author of the new report.
“Even without an economic crisis or a sudden growth in loans, we believe that the aggregate level of non-performing loans (NPLs) for the entire banking sector will continue its gradual worsening trend albeit at a lower pace,” says Satel. “However, the coverage by provision is expected to improve.”
The banks’ strategies will continue to be cautious regarding the expansion of the loan portfolio in the medium term until faster economic growth is established and macro-economic conditions improve, said Moody’s. In the meantime, retail-lending activities are expected to grow while consolidation of the corporate book takes place.
Lebanese banks are expected to remain liquid in foreign currency going forward. However, long-term placement with the central bank or lending to the government at relatively high real rates may affect banks’ core liquidity ratios while increasing their risk profile, noted the rating agency.
The banks’ capital base has improved markedly over the past few years through new capital injection and retained earnings. However, the system’s economic capital remains relatively low in light of the high exposure to government securities.
The banks’ foreign currency deposit ratings will continue to be constrained by the ceiling for such deposits in Lebanon. “The likelihood of support from the Lebanese monetary authorities, particularly for large banks, is high,” said Satel. “In addition, support from core shareholders in the event of banks facing financial difficulties would also be forthcoming.”
Such a high likelihood of support is a significant rating driver for the Lebanese banks’ deposit ratings. Moody’s estimates the local currency ratings of the three rated Lebanese banks to be a few notches above the country ceiling.
As a consequence, and in accordance with Moody’s revised country ceiling policy, the foreign currency debt issues of BLOM Bank and Bank Byblos have been rated at B1, one notch higher than the foreign currency bond rating of the Lebanese government. — (menareport.com)
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