Moody's: Lebanon's weak environment will continue to weigh on the banking system

Despite signs of stabilization in the economy -- including a slight rebound in tourism and a net positive impact from low oil prices and the depreciation of the euro -- the subdued operating environment will continue to weigh on Lebanese banks' performance over the next 12-18 months, says Moody's Investors Service in a report published recently. As a result, the rating agency's outlook on Lebanon's banking system remains negative.

Moody's report, entitled "Banking System Outlook: Lebanon," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"We expect Lebanese banks' operating environment to remain weak. Credit exposure to the weakened Lebanese sovereign, as well as dampened profitability, remain key challenges," says Alexios Philippides, Moody's lead analyst for Lebanese banks.

Despite signs of stabilization in certain sectors of the economy, GDP growth will remain subdued, as political uncertainty will hinder private investment and impair the government's ability to enact structural reforms, says Moody's. The rating agency projects that real GDP growth will pick up in 2015 to 2.5% compared with 2.0% in 2014, but will remain below historical trends.

Moody's also expects Lebanon's government to continue to rely on the domestic banking sector for financing, with direct exposure to Lebanese sovereign debt equivalent to 2.6 times banks' Tier 1 capital as of April 2015. Weakening in the real estate and construction sectors and softening house prices could lead to renewed asset-quality pressure.

In this context, lower new business generation and elevated loan-loss provisioning needs will continue to weigh on banking sector profitability, according to the rating agency. It expects lending growth of below 5% for 2015, mainly driven by the central bank's economic stimulus package introduced in 2013 and updated in 2015 with $1 billion in low interest loans available to banks for on-lending.

Nevertheless, despite the challenging conditions, Moody's expects the banking system's funding strengths to remain, along with possible improvements in capitalization. The rating agency says Lebanese banks will continue to grow their stable deposit funding bases over the outlook period. Customer deposits represent more than 80% of system liabilities, and are supported by inflows of remittances from the Lebanese diaspora, which is equivalent to 15%-20% of GDP on an annual basis. At the same time, modest capital levels will continue to improve, driven by the phasing-in of Basell III rules.