BEIRUT: Standard & Poor’s said Lebanese banks’ risk assessment has slightly diminished this year although the risk ranking remains relatively high. “S&P revised upward Lebanon’s Banking Industry Country Assessment (BICRA) to Group ‘8’ from Group ‘9’ and its economic risk score to ‘9’ from ‘10,’ while it assigned an industry risk score of ‘6,’” the report said.

S&P indicated that Lebanon’s economic risk score reflects its “very high risk” in terms of economic resilience, its “high risk” in economic imbalances, and its “extremely high risk” in terms of credit risk in the economy.

It said that the current political instability in Lebanon is preventing much needed economic and fiscal reforms.

It noted that the Lebanese economy is small, is largely reliant on services, banking and tourism, and has to cope with recurring uncertainties and shocks.

But it added that Lebanon has managed to maintain its currency peg to the U.S. dollar, contributing to sustained confidence in the banking sector.

The BICRA framework evaluates and compares global banking systems, and covers a country’s rated and unrated financial institutions.

It assigns scores to banking systems on a scale from one to 10, with “Group 1” including the least risky banking sectors and “Group 10” the riskiest ones.

Other countries in BICRA “Group 8” are Argentina, Georgia, Kazakhstan, Nigeria, and Tunisia, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The report also warned of potential imbalances originating from Lebanon’s recent fast-paced lending growth, mainly as credit to the construction sector, which has consistently outpaced GDP growth.

It considered that Lebanon’s current account deficit constitutes a weakness for the banking system, where financing relies on continued investor confidence.

It added that banks’ exposure to the Lebanese government’s debt constitutes the main systemic risk, as this exposure accounts for around 54 percent of the sector’s consolidated assets and was equivalent to seven times the sector’s total equity at end-August 2011.

In parallel, the agency said that Lebanon’s industry score indicates that the country faces “high risks” in its institutional framework and competitive dynamics, and “intermediate risks” in system-wide funding.

It said Lebanon has an adequate track record of regulation and supervision, which supports the banks’ ability to attract steady flows of deposits and support the government’s financing needs.

It considered that the Central Bank and the Banking Control Commission are largely independent from Lebanon’s government, and that the latter is not willing to risk a destabilization of the banking system.

But it noted that transparency is a weakness, mainly as the sector suffered from chronic bouts of governance issues.

Further, it pointed out that the sector’s competitive landscape is crowded, but is largely concentrated around a dozen players.

It considered that the domestic economic slowdown, along with regional unrest, may increase the cost of risk substantially in the next few years and temporarily stall banks’ asset diversification away from sovereign risk.

Further, it considered that the banking sector’s funding constitutes a factor of strength, as retail deposits are the main funding sources and have been resilient in past crises.

S&P classified the Lebanese authorities as “supportive” of the banking sector, but noted that extraordinary support to banks in times of stress would be constrained by the government’s limited financial flexibility.

The performance of the Lebanese banking sector in the first nine months of 2011 was relatively good although the growth in assets and deposits were lower than the previous year.

Profits of most leading banks in the country also fell slightly in the third quarter and this drop was attributed to the economic slowdown, political wrangling and the turmoil in neighboring Syria where six Lebanese banks operate.