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Bankers fearful of credit rating downgrade

The Finance Ministry building in Beirut. (The Daily Star/Mahmoud Kheir)

BEIRUT: A prominent Lebanese banker warned Thursday of grave consequences if the international agencies lower their ratings of Lebanese government securities, adding that banks were now more inclined to reduce their risk exposure to the sovereign bonds.

“So far, the Lebanese banks can cope with Moody’s B1- rating. ... But if the agency decided to downgrade the rating to CCC, then this will raise the average weight of solvency on the Lebanese Eurobonds from 100 to 150 and this is very serious,” the banker told The Daily Star on condition of anonymity.

Moody’s warned Thursday that banks’ profitability would remain under pressure due to high credit charges, low fee-income generation and net-interest income growth, and pressure arising from banks’ operations in the region.

The banker claimed Central Bank Governor Riad Salameh had issued a circular to Lebanese banks announcing that the impact of solvency on the certificate of deposits in dollar-denominated currency had been reduced from 100 to 50.

“I think Salameh made this move in anticipation of a further downgrade of the sovereign bonds,” the banker said.

“It seems that the governor wants to encourage banks to subscribe to the CDs instead of Eurobonds because the risk weight on the CDs is lower than the Eurobonds.”

He also disclosed that some foreign banks had stopped their correspondence deals with some Lebanese banks due to the high-risk exposure and negative rating.

However, he said “the foreign banks are applying this policy to other emerging markets and not to Lebanon only.”

He stressed that banks would not allow the government to borrow more money from them because of the increasing risk involved.

The source said that although banks would rollover the maturing Eurobonds, they had no intention of taking on new bonds.

He added that the yields on the 10-year CDs were around 7 percent and said this was even better than the Eurobonds.

Nassib Ghobril, head of economic research at Byblos Bank, said the government should take a more active role in tackling the deficit.

“It’s all about the budget deficit. It’s unacceptable to let the deficit to the GDP reach 9 or 10 percent. The government should do more about reducing the deficit,” he argued.

Joe Sarrouh, adviser to the chairman of Fransabank, echoed Ghobril’s view, underlining how a lower budget deficit would encourage ratings agencies to revise their outlooks for sovereign securities and Lebanese banks.

“The banks have abundant liquidity and can continue to finance the public debt. However, Moody’s B1- rating is indicative of things to come,” he said. “It’s true that banks are the biggest subscribers of the sovereign bonds, but we would prefer to see foreign investors buy 20 or 30 percent of these issues in the future as sign of confidence.”

Moody’s said the outlook reflects banks’ increasing exposure to B1-rated Lebanese government securities, which leaves their modest capital buffers susceptible to sovereign event risk.

In a report, the agency outlined Lebanon’s “Asset-quality pressures, owing to weak economic growth that continues to be adversely affected by the ongoing conflict in neighboring Syria and domestic political tensions; and high provisioning needs and limited new business generation that will dampen profitability.”

Over the outlook period, however, Moody’s also expects banks to continue to grow their stable deposit-based funding profiles and maintain solid liquidity buffers.

Moody’s expects that the operating environment will remain challenging for Lebanese banks, with GDP forecast to grow by 2 percent in 2014, well below the 8 percent average for 2007-10.

“The ongoing conflict in Syria and domestic sectarian tensions escalating into sporadic violence within Lebanon will continue to weigh on key sectors of the economy, including tourism, real estate and construction. Political uncertainty will also lead to reduced private investment and impair the government’s ability to enact structural reforms,” Moody’s predicted.

Moody’s anticipates that the budget deficit will rise to 11 percent of GDP for 2014, with the government relying on the domestic banking sector for financing. Against this backdrop, the rating agency expects subdued business generation and 2014 credit growth of 6-9 percent nominally, well below the average annual credit growth of 24 percent from 2007-10.

“Lebanese banks’ high and growing exposure to Lebanese sovereign risk (B1 negative) will remain a major source of credit risk over the outlook period, leaving them susceptible to sovereign event risk,” the report said.

“Government securities and Central Bank (Banque du Liban, BdL) certificates of deposit account for an estimated 43 percent of system assets as of end 2013, equal to five times the system’s Tier 1 capital.”

 
A version of this article appeared in the print edition of The Daily Star on March 21, 2014, on page 5.

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Summary

A prominent Lebanese banker warned Thursday of grave consequences if the international agencies lower their ratings of Lebanese government securities, adding that banks were now more inclined to reduce their risk exposure to the sovereign bonds.

However, he said "the foreign banks are applying this policy to other emerging markets and not to Lebanon only".

He stressed that banks would not allow the government to borrow more money from them because of the increasing risk involved.

Moody's said the outlook reflects banks' increasing exposure to B1-rated Lebanese government securities, which leaves their modest capital buffers susceptible to sovereign event risk.

Over the outlook period, however, Moody's also expects banks to continue to grow their stable deposit-based funding profiles and maintain solid liquidity buffers.

Moody's expects that the operating environment will remain challenging for Lebanese banks, with GDP forecast to grow by 2 percent in 2014, well below the 8 percent average for 2007-10 .

Against this backdrop, the rating agency expects subdued business generation and 2014 credit growth of 6-9 percent nominally, well below the average annual credit growth of 24 percent from 2007-10 .


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