BEIRUT: Falling interest rates and spreads are taking their toll on the profits of the Lebanese commercial banks, which saw their net income in the first 11 months of 2011 fall by 10.3 percent compared to the same period of 2010. The net profits of the banking sector up to November 2011 reached $1.378 billion, compared to $1.642 billion in the same period of 2010, Central Bank figures showed.

The results are confined to the domestic operations of the banks.

“Central Bank statistics for the first 11 months of 2011 show that bank profits amounted to $1,378 million, which is equivalent to a net contraction of 10.3 percent year-on-year,” said a report published by Bank Audi’s Lebanon Weekly Monitor.

It added that this was first such contraction in profits in eight years.

“The contraction in net profits comes within the context of lower activity growth over the year, coupled with downward pressures on spreads and interest margins. Also, non-interest income is reflected in the slowdown of private spending, and is believed to have stagnated over the past year,” the report said.

Marwan Barakat, head of research at Bank Audi, told The Daily Star that these results do not cover the consolidated profits and growth of the Lebanese banks, which also have operations in many other countries.

He expected profits of banks to fall at the end of 2011 due to the pressure on spreads and margins.

“The interest rates globally have fallen in 2011 and this trend is likely to continue in 2012. The LIBOR [London Interbank Offered Rate] is only 0.5 percent. We are seeing the lowest drop in interest rates in history,” Barakat said.

He added that average cost of deposits in Lebanon is about 3 percent in foreign currency while the LIBOR is only 0.5 percent.

“Lebanese banks are investing their liquidity abroad at 0.5 percent. This means that we have a negative carry of 2.5 percent,” Barakat explained.

He added that banks are trying to diversify their income by reducing their dependence on interest generated income. But revenues from commissions and fees do not exceed 35 percent of the total profits of the Lebanese banks, he added.

Barakat believes that interest rates abroad are not going to increase in 2012 and this negative carry is likely to persist throughout all of next year.

Audi said that the negative carry on primary liquidity is the result of the spread between the average cost of Foreign Currency deposits (2.84 percent) and Libor (0.53 percent) within a historical low interest rate environment.

“On the Lebanese Pound side, banks have renewed their Lebanese Pound Treasury bills maturities at 2 percent less than initial subscription yields, while the cost of Lebanese Pound deposits barely declined by 10 basis,” the Audi report noted.

Banks’ return on assets declined from 1.27 percent in 2010 to 1.08 percent in the first 11 months of 2011.

“Similarly banks’ return on equity contracted from 17.8 percent to 14.3 percent respectively. Efficiency ratios were likewise adversely impacted, as bank profits per branch contracted by 8.5 percent during the year while net profits per employee dropped by 8.6 percent over the year.

“It is yet worth mentioning that notwithstanding the contraction in return ratios, banks financial soundness indicators continue to display favorable levels,” the report said.

It added that the average Basle II capital adequacy ratio remains above 12 percent, while doubtful loans to total loans reached a decade low of 3.42 percent.