BEIRUT: A decline in deposit interest rates hinges on increased confidence in Lebanon’s political and macroeconomic performance, bankers told The Daily Star, as Lebanese banks reported waning net profit growth in 2011.

Lebanon’s two largest banks Audi and BLOM reported this week a net profit of $365 million and $331.5 million respectively, with the first rising by 3.7 percent and the second by only 0.02 percent.

Other Lebanese banks listed on the Beirut Stock Exchange are expected to release their yearly results for 2011 before the end of this month.

Head of Research at Bank Audi Marwan Barakat said banks would see increased pressure on interest rate spreads as more Lebanese pound Treasury Bills mature in 2012 and banks renew them at 2 percent less than the initial subscription yields, while the cost of Lebanese pound deposits remains stable.

Regarding the U.S .dollar, Barakat told The Daily Star that the negative carry on primary liquidity in foreign currency would continue throughout 2012 because interest rates globally are expected to remain low.

He added that the average cost of deposits in Lebanon is about 3 percent in foreign currency while the London Interbank Offered Rate (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. We are seeing record low LIBOR ... and the Federal Reserve is saying it is not considering raising interest rates,” Barakat explained.

He said a decision to maintain interest rates at the current level or lower is dependent on the political and macroeconomic performance of Lebanon.

Head of Economic Research at Byblos Bank Nassib Ghobril said the Association of Banks recommended last week to its members reducing interest rates on deposits upon renewal by 50 basis points, especially on Lebanese pound deposits.

“Can banks lower their interest rates? This remains to be seen. But can they maintain the same rate while it erodes their profitability?” Ghobril asked.

However, an adviser to Fransabank’s chairman, Joe Sarrouh, downplayed the importance of falling interest margins on declining bank profits, attributing the slowdown to lower economic activity in general and provisions of profits in Syrian entities.

“There are some banks doing better than others. For example, Bank Audi reported that earnings per share were up 7 percent in 2011, which means more efficiency in operations,” Sarrouh said.

He added that while margins are down, they remain at an acceptable rate considering the circumstances. “I think economic activity will pick up in the second half of 2012.”

He warned that continued slow economic activity next year would pile pressure on interest rates.

“But this will be the last resort. Banks should rather seek more efficiency in operations to have a better grip on the expenses side,” he said.

To support the entire economy and help banks find new projects to finance, Ghobril said Lebanon should see a decline in the borrowing need of the government, which is what the initiation of public-private partnership would do.

“Today the banks are competing for the same share of the market at the current economy growth rate, which isn’t growing enough to create new clients,” he said.

“If you take a look at the balance of payments, we have recorded a deficit of $2.7 billion in the first 11 months of 2010 attributed in part to a large trade deficit and in part to the fact that more money is leaving the country than coming in,” he added.

He added that bank investments and lending abroad have declined due to a global slowdown in growth.

Lebanese commercial banks saw their net income in the first 11 months of 2011 fall by 10.3 percent compared to the same period of 2010. This was the first such contraction in profits in eight years.

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 banks’ domestic operations.

“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,” a report released last week by Bank Audi said.

Banks are trying to diversify their income by reducing their dependence on interest generated income, though revenues from commissions and fees still do not exceed 35 percent of the total profits of Lebanese banks.