Moody warns Lebanese public debt credit risk for banks
BEIRUT: Moody’s rating agency warned that the increasing exposure to the growing public debt in Lebanon is a major source of credit risks for Lebanese banks.
Moody’s, which released a new report about the credit rating of Lebanese banks, maintained its negative outlook of the local lenders amid a volatile regional situation and lower GDP growth.
“Our outlook for the Lebanese banking system remains negative, primarily reflecting our expectations of continued weak economic growth that will slow credit expansion and raise asset quality pressure for banks, driven by the conflict in neighboring Syria and a domestic political deadlock that discourages private investment and impairs the government’s ability to enact structural reforms and approve capital spending; and high and growing credit exposure to the weakened Lebanese sovereign [B2 negative], which leaves the banks’ modest capital buffers vulnerable to sovereign event risk,” Moody’s said.
All international rating agencies have repeatedly warned that Lebanese banks are becoming more vulnerable to unfavorable condition if they continued to hold a big chunk of the government’s bonds in their coffers.
The bulk of the Eurobonds and Treasury bills are held by the Lebanese commercial banks and the Central Bank of Lebanon.
The successive Lebanese governments continued to tap the local market and Lebanese banks in particular to finance the public debt which now stands at over $71 billion.
Moody’s feared that Lebanese will continue to face difficult operating environment in the future if the conditions did not change.
“We forecast real GDP growth of 1.7 percent in 2016 [2015: 1.3 pct], well below the 2007-10 average [9 percent], and we expect the budget deficit to remain high at around 8 percent of GDP for 2016-171, with the government relying on the domestic banking sector for financing. Although key economic sectors such as tourism show signs of stabilizing after years of decline, downside risks from deterioration in domestic security persist. Further, Lebanon relies on hydrocarbon imports, and while low oil prices have boosted disposable income, continuing low oil prices will have a negative impact on capital flows from the Gulf. Against this backdrop of subdued business activity, we expect lending growth of below 6 percent, compared with average annual credit growth of 24 percent in 2007-10, mainly driven by economic stimulus from the central bank,” the agency said.“We expect credit pressure to rise over the outlook period, and estimate loan-loss provisions to remain elevated at 1 percent to 1.5 percent of gross loans for the year and non-performing loans to increase above 5 percent of gross loans, up from 4 percent at year-end 2015. Asset-quality pressure will be especially pronounced in the construction and real estate sectors, which accounted for 24 percent of system loans at the end of December 2015, and in retail credit,” Moody’s said.
But despite these negative elements, Moody’s noted that the private equity of Lebanese banks will remain stable in general.
“We expect system equity-to-total assets to remain stable at 9 percent for 2016, a modest level considering the difficult operating environment and banks’ aforementioned very high sovereign exposures. If we apply a 100 percent risk weight to sovereign securities, in line with our global standards, we estimate the year-end 2015 system Tier 1 ratio stood at 11.8 percent,” the agency explained.
It also expected banks to maintain steady but limited profits.
“We expect the rated Lebanese banks to post net income to tangible assets of between 0.9 percent and 1.1 percent in 2016 [2014-15: 1 percent] supported by their overseas operations and broadly stable interest spreads. Downside risk arises from banks’ interest income from sovereign-related investments, which still accounts for more than one-third of operating income, since their exposure to interest rate risk increases as the maturity of these instruments lengthens,” Moody’s said.