03 March 2017
BEIRUT: The Central Bank’s financial engineering has beefed up the balance sheets of the Lebanese lenders and this was a credit positive in light of mounting risks, according to Moody’s Investors Service report.
“The three largest banks in Lebanon (B2 negative), Bank Audi (B2 negative, BLOM Bank (B2 negative, b2) and Byblos Bank (B2 negative, b2) published their full-year 2016 preliminary results. The results showed that the banks have used all proceeds from their participation in the exchange deal offered by the Banque du Liban (BdL) ... to bolster their balance sheets, a credit positive in light of elevated risks,” Moody’s said.
In May and November 2016 the Central Bank of Lebanon purchased around $13 billion of Lebanese pound (LBP)-denominated Treasury bills (T-bills) from commercial banks at a premium which helped the banks to report impressive financial results at the end of last year.
The Central Bank has launched the financial engineering in a bid to bolster its foreign currency reserves and improve the balance of payments.
The Lebanese banks purchased dollar-denominated financial instruments from the Central Bank.
“According to BdL’s instructions, banks allocated these non-recurring LBP revenues to book collective provisions of 2 percent of risk-weighted total loans. They also used the LBP revenue to cover any shortfalls from the implementation of International Financial Reporting Standards 9 and higher capital requirements2 due in 2018, as well as to impair goodwill from acquisitions and cover any foreign exchange-related losses in translating foreign operations,” Moody’s said.
But the Central Bank initiative substantially increased the banks’ Lebanese pound-denominated currency reserves (close to LL19 trillion or $12.6 billion).
This prompted some major banks to offer products with lucrative returns to absorb dollar cash.
These products generated hefty revenues to these banks which were quite visible in their balance sheets.
“Bank Audi disclosed that it achieved exceptional revenues of nearly $1 billion from the transaction and allocated $178 million as collective provisions, $128 million to impair goodwill and $205 million to write-off investments in Syria and Sudan. The bank used the remaining 70 percent of these revenues as reserves for capital increase and 30 percent as deferred liabilities that are part of Tier 2 capital,” Moody’s said.
It added that both BLOM Bank and Byblos Bank achieved significant exceptional revenues.
“The banks used these amounts to predominantly book provisions related to the expected effect of IFRS 9 implementation, while at the same time BLOM Bank wrote off its Syrian subsidiary and deconsolidated it, and Byblos Bank wrote off its subsidiaries in both Syria and Sudan,” Moody’s said.
But Moody’s warned that this swap operation has increased Lebanese banks’ high exposure to the sovereign and the average life of these holdings, and reduced the banks’ foreign liquidity.
“We estimate that, as of November 2016, the banking sector’s overall sovereign exposure was equivalent to 5.9x Tier 1 capital, up from 5.4x in April 2016. Furthermore, Lebanese banks’ foreign assets, mostly in the form of foreign bank placements, declined $1.9 billion during the same period.
Consequently, banks raised interest rates on dollar deposits to a weighted average of 3.48 percent in November from 3.26 percent in May to attract additional inflows and shore up dollar liquidity, although they ended up with excess LBP liquidity,” the report said.
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