| 23 September, 2017

Moody’s upgrades Lebanon’s banking system outlook to stable

A Moody's sign on the 7 World Trade Center tower is photographed in New York.

A Moody's sign on the 7 World Trade Center tower is photographed in New York.

REUTERS/Mike Segar

BEIRUT: International rating agency Moody’s has changed its outlook on Lebanon’s banking system to stable from negative, reflecting greater political stability and an improvement in economic growth. “The outlook expresses Moody’s expectation of how bank creditworthiness will evolve in Lebanon over the next 12-18 months,” the rating agency said.Other rating agencies have also changed their outlook of the banking sector to stable, noting a real improvement in the political and economic picture following the election of President Michel Aoun and the creation of a national unity government.

The rating agency also projected Lebanon’s real GDP growth at 2.8 percent in 2017 and 3 percent in 2018, up from 1.8 percent in 2016, because of the positive spillovers from renewed political stability.

“The election of a president in October 2016 and the formation of a new cabinet ended a multiyear political vacuum. In mid-June 2017 Parliament approved a revised electoral law, clearing the way for the long-delayed legislative election to be finally held in May 2018,” the agency explained.

“After years of deterioration, the operating environment is stabilizing,” said Alexios Philippides, an assistant vice president at Moody’s. “However, economic output will continue to be constrained by deteriorating basic infrastructure and businesses will defer investment decisions until there is further clarity on the political situation.”

He added that the rating agency expects modest credit growth of 6 percent over the outlook period, similar to 2016, driven by the central bank’s support packages.

Moody’s expects Lebanese banks to continue attracting a steady flow of customer deposits.

“This will enable the banking sector to finance both the government deficit, which the agency expects will average 9 percent of GDP in 2017 and 2018, and the private sector. Banks’ high sovereign exposure, around half of banks’ assets in June 2017, will increase. This exposure links banks’ creditworthiness to that of the government and also exposes them to high interest rate risk,” Moody’s said.

It also expected the banks’ regulatory capital ratios to rise over the outlook horizon as higher Basel III capital requirements are phased in by end-2018, such as a minimum Tier 1 ratio of 13 percent.

Lebanese banks’ capital buffers will remain modest, however, in view of their very high sovereign exposure and the volatile operating environment in Lebanon.

But Moody’s warned that proposed government taxes could affect the profitability of the Lebanese banks: “Banks’ profitability will be challenged by a higher effective tax rate and limited new business. However, Moody’s expects new provisioning needs to be low because banks used large one-off revenues in 2016 to book substantial collective provisions.”

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