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BEIRUT: Lebanese commercial banks are bracing for another drop in their profits once the 10 percent tax on interest income takes effect. Bankers say they have already paid more than their share to help the government deal more effectively with the rising deficit, and warn against deeming Lebanese banks an easy recourse every time the authorities want to increase revenues.
Several bankers told The Daily Start that profits of lenders would decline if the new tax were to be implemented, adding that the tax effectively would rise to 50 percent on leading banks and more than 60 percent on small and medium-sized banks. The bankers argue that double taxation means lenders will pay 10 percent on interest income on deposits, Treasury bills and certificates of deposit held in the Central Bank, plus 17 percent tax on the total profits.
At an event over the weekend, Chairman of Bank of Beirut Salim Sfeir made it abundantly clear that banks had played a major role in shaping the Lebanese economy.
The economy was entirely absent from the minds of the successive governments and the basic role of the national structure was left to circumstances, events and coincidence. And, even the decisions adopted have negatively impacted the economic reality, leaving negative repercussions on the various sectors. Today, the entire country is living the era of the preparation for the budget which has taken six months, and what is left of the year is only six more months, Sfeir said.
The chairman was reacting to the governments intention to raise the tax on interest income from the current 7 percent to 10 percent for a period of three years. Our [Lebanons] situation may still be rectified, in the event the needed plan [budget] becomes available. The liquidity is available and our Lebanese pound is stable, however the absence of economic growth is a considerable issue and places us in a sensitive, delicate position, Sfeir said.
He responded to some critics who have claimed that the banks were making high profits, warning that credit ratings agencies would not hesitate to lower their classifications of Lebanese banks if the profits continued to decline.
As and when banks do not achieve profits and increase their returns on investment, their classification will decline and this will certainly lead to a regression in the credit rating of the country as a whole. In fact, banks role is exposed to unjustified prejudice, particularly as they represent the backbone of the national economy, he said.
Sfeir added that some quarters were accusing the banks of making profits without taking into account the size of private equity funds, which constitute the major pillar of the solvency, safety, and effective continuity of the sector.
Continuing to target this productive sector will only result in negative repercussions if we consider the need to enable this sector to attract fresh deposits in an effort to finance the economic cycle and the needs of the Lebanese government, Sfeir said. The chairman added that there was a general misconception about the distribution of profits of the Lebanese banks. He said that approximately 62 percent of the total profit was for depositors, while 20 percent went toward operating expenses and cost of risk.
The remaining 18 percent - of which interest and profit taxes are disbursed, and on the basis of the current budget - what remains is almost half, which is 9 percent; this 9 percent, of which about 3-4 percent will be distributed to shareholders - these profits are subject to 10 percent dividend tax, Sfeir said.
He added that with the remaining 9 percent, banks are required to add to the regular reserves within the private funds to comply with international standards, according to the Central Bank of Lebanons regulations, in particular the Basel III solvency ratio.
These agreements and banking procedures are not up to our choice and we have no alternative but to implement, otherwise we are out of the international market.
The chairman said the government should seriously reduce the size of the public sector to lower spending. These necessary measures must be implemented within the framework of a comprehensive economic policy, by seriously considering the issue of reducing the public sector, with a reduction in nonproductive expenditures, Sfeir said.
Nassib Ghobril, head of the economic research department at Byblos Bank, confirmed that the new tax on interest income would affect the profitability of the commercial banks. The 2017 budget, which called for increasing taxes on interest income from 5 to 7 percent plus taxes on the profits from the income generated from these certificates of deposit and T-bills held in the Central Bank, effectively raised taxes on banks to 40 percent in 2018, Ghobril added.
He said the 10 percent tax on interest income would raise the tax on banks to 50 percent on average.
Ghobril said he expected small and medium-sized banks to pay even higher taxes than larger banks because most of their income is generated from interest on T-bills and certificates of deposit.
The other negative impact from the 2017 tax was translated into a $1.4 billion drop in bank lending to the private sector in 2018, he added. Ghobril said companies and merchants were reluctant to borrow money from the banks due to the rise in interest rates. He again called on the government to crack down on tax evasion instead of raising new taxes.
In the first quarter of 2019, Lebanons 16 largest banks with assets of $2 billion and above also saw their net profits contract within the context of a tough operating environment in Lebanon and in foreign markets of presence, Bankdata Financial Services said. Net profits declined by 8.1 percent in the first quarter of 2019 relative to the same period of last year. Domestic profits, which account for 85 percent of consolidated profits, were down by 8.5 percent in the first three months.
Despite the fact that operating expenses were down by 4.2 percent within the context of cost control efforts by Alpha banks, operating profit contracted by 7.8 percent, driven by the 5.9 percent drop in net operating income at large, Bankdata Financial Services said.
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