Tough road ahead for Lebanon’s banks
In its report issued in May 2015, the International Monetary Fund (IMF) warned against the exceptional risks and challenges facing Lebanon as a result of several political and security factors both at the domestic and foreign levels. These challenges also result from worrying economic factors in terms of growth, the damage to the economic sectors (tourism, real estate) and the deterioration of public finances.
On the other hand, the IMF reiterated the durability and flexibility of the [Lebanese] banking sector and its ability to confront challenges, as it registered in recent years good growth rates, maintained the stability of interest rates and successfully covered the needs of the public and private sectors.
The banking sector is facing many challenges including:
1. The slowdown in economic activity: Economic growth has significantly subsided in recent years from 7% to less than 2%. Tourism sector activity shrank by about 40%, the commercial sector by about 30% and the real estate sector by about 25%. Also, foreign direct investment shrank by about 42% and moved from $4.9 billion to less than $2.8 billion, while exports contracted by about 23% and moved from $4.3 billion to $3.3 billion. At the same time, the balance of payments moved from a surplus of nearly $3.3 billion to a deficit of nearly $1.2 billion.
2. The deterioration of public finances and the growing public debt constitute the biggest challenge for the banking sector due to their impact on the credit rating of banks with sovereign debt exposure (about 59% of the public debt, or approximately $39.2 billion), as well as on interest rates and the confidence of investors and depositors.
In this context, we notice the increased exposure of banks to sovereign debt compared with the total foreign currency deposits, which increased from 13.4% in 2012 to 15.7% in 2013, and the Lebanese pound deposits, which increased from 39.6% to 41.5%. This prompted global assessment institutions to decrease the credit rating of some major banks without relying on the financial strength of these banks. Also, in 2015, the fiscal deficit grew to 10.5% of GDP, while the public debt reached 143% of GDP.
3. The growing problems facing economic institutions as a result of instability, the declining economic activity, the rising operational costs and the difficulty of covering financial obligations. This led the institutions to ask the Central Bank of Lebanon and the commercial banks for facilities to settle their loans. Non-performing loans account for 5.4% of the total loans, and are covered with provisions of 76%. This rate is considered high compared with the regional percentage, which is close to 4.6%. Meanwhile, there are concerns over increasing non-performing personal loans amounting to approximately 27.8% of the total loans, knowing that 16.1% of them are housing loans as a result of the growing financial problems plaguing families.
4. Maintaining the banking sector growth pace:
• The asset growth pace fell from 8.5% in 2013 to 6.6% in 2014.
• The deposit growth pace fell from 9% in 2013 to 6.1% in 2014, knowing that the sector needs no less than 6% growth in deposits per annum to be able to cover the needs of the public and private sectors.
• The loan growth pace declined from 9.5% in 2013 to 9.3% in 2014 despite the incentives made to support interest and loans allocated by the Central Bank of Lebanon in 2014, which amounted to about 1.6 trillion Lebanese pounds [$1.06 billion], about 60% of which were allocated to the housing sector.
• Profit: in 2014, a slight decrease of 1% was registered. It reached about $1.63 billion versus a 4.9% growth rate in 2013.
5. The tight domestic market, the limited investment opportunities and the excessive liquidity in banks (30% of total deposits) because of a decline in foreign direct investment, a slowing economic activity and real estate and consumer loans reaching maximal levels. These conditions prompted banks to give more loans to the non-resident private sector. The rate of these loans increased from 12.4% of total loans in 2013 to 13.5% in 2014. Also, the tight domestic market exhorted banks to look for foreign markets.
6. Foreign — especially regional — proliferation risks: regional events increase the banks’ proliferation risks (Syria, Turkey, Iraq), and impede their expansion ability. It affects their activity and profitability and leaves an impact on the Lebanese activity and incomes in these countries. The Association of Banks [in Lebanon] (ABL) report pointed out that 17 Lebanese member banks are spread in 31 countries.
7. Regional competition: regional banks have been able to compete with Lebanese banks, as they now have the knowledge, experience, wide expansion and the ability to offer modern and advanced banking services to their customers.
8. Legislation and international law: They limit the banking sector activity and impose constraints given the international requirements of commitment to international sanctions (Syria, Iran …), self-censorship in terms of transfers and deposits, the FATCA laws, the anti-money laundering procedures and the international standards relating to Basel (capital, solvency, liquidity). They also gradually restrict banking secrecy, especially after the adoption of the two laws related to tax information exchange between Lebanon and foreign countries, and the mandatory declaration of cross-border cash transfer.
