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Proposed taxes could affect banks’ profitability: FFA

BEIRUT: Profits of Lebanese banks could drop if Parliament approves a proposal to tax lenders’ income from assets tied to sovereign bonds, FFA Private Bank said.

“The tax on interest earned on deposits could slow deposits growth, which has already seen deceleration in the first two months of 2014 while tax on income earned from financial assets could impact profitability,” FFA said in a special report issued Thursday about the projected growth of the banking sector in 2014.

Finance Minister Ali Hasan Khalil has proposed raising taxes on interest on customer deposits from 5 percent to 7 percent and applying a similar tax on banks’ investments in sovereign bonds.

This proposal has infuriated the banking sector, with banks warning that they may be compelled to raise the interest rates on personal and housing loans to make up for the drop in profits.

The advocates of this tax argue that the profits of the banking sector would only fall by $146 million each year, noting that the net profits of the lenders in 2013 were $1.7 billion.

They also dismissed the possibility that Lebanese banks would shun the country’s sovereign bonds and move investments abroad.

But observers rule out any decision about the taxes in the near future because Parliament and the major political parties are now focused on the upcoming presidential election.

“We note that since details are lacking and the law is yet to be agreed upon, we have not reflected this impact on the forecast of banks under coverage. The ongoing debate over the funding of the increase in public sector wages was put forward two weeks,” FFA said.

Citing statistics from the Association of Banks in Lebanon, FFA said Lebanese banks were still operating in a low interest environment, limiting the potential to improve yields with little room to further decrease the cost of funds.

“Spreads in USD decreased to 1.27 percent in February 2014 down from 1.57 percent one year earlier which has a substantial impact on Lebanese Bank’s profitability given that the bulk of their liquidity is in USD,” the report said.

“While it is still early to draw a conclusion for 2014e in terms of growth in balance sheet, we note a deceleration into Feb-14,” FFA said.

“Figures for the first two months of 2014 pointed to slower growth in key indicators at around 0.5 percent YTD (Year-To-Date), with assets, deposits and loans totaling $166 billion, $136 billion and $47 billion respectively. Non-resident deposits dropped by 4 percent in 2M-14 to $27 billion,” FFA said.

 
A version of this article appeared in the print edition of The Daily Star on April 18, 2014, on page 5.

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Summary

Profits of Lebanese banks could drop if Parliament approves a proposal to tax lenders' income from assets tied to sovereign bonds, FFA Private Bank said.

Finance Minister Ali Hasan Khalil has proposed raising taxes on interest on customer deposits from 5 percent to 7 percent and applying a similar tax on banks' investments in sovereign bonds.

This proposal has infuriated the banking sector, with banks warning that they may be compelled to raise the interest rates on personal and housing loans to make up for the drop in profits.

The advocates of this tax argue that the profits of the banking sector would only fall by $146 million each year, noting that the net profits of the lenders in 2013 were $1.7 billion.


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