BEIRUT: The near-term outlook for growth of the Lebanese banking system appears strong, reflecting current buoyant economic conditions, according to research by Deutsche Bank. The research was published by Bank Audi.
“However, growth is likely to moderate somewhat over the next couple of years, as per the Bank, as GDP growth is forecast to slow to the 4-5 percent range,” the report said.
The strength of the US dollar is also a determinant of banking system growth, as this has some impact on capital flows into the country. According to Deutsche Bank, Lebanese banking sector asset growth of around 8-10 percent per annum can be sustained over the coming years.
The report noted that the banking sector in Lebanon stands out from that of other countries, primarily because of its large deposit base, equivalent to over three times the country’s GDP. This reflects the importance of remittance flows into the country (equivalent to 21 percent of GDP in recent years).
Meanwhile, strict banking secrecy laws, low rates of corporate (15 percent) and personal tax (20 percent maximum), high deposit interest rates (averaging almost 3 percent on dollar deposits and close to 6 percent for LBP deposits), a stable currency and a robust financial system have also all contributed.
However, according to Deutsche Bank, a stringent regulatory framework has restricted Lebanese banks’ ability to utilize deposit funding for lending purposes. Banks must deposit 15-25 percent of their deposits at the Lebanese Central Bank, and the banks are also significant holders of Lebanese government debt. Accordingly, the Lebanese banks’ loans/deposits ratio is 32 percent.
The report also noted such stringent regulations require banks to maintain significant holdings of liquid assets that have led them to register a lower return on assets and equity than their international peers.
Nevertheless, profitability has improved significantly in recent years, reflecting a combination of strong volume growth, better cost efficiency and higher asset quality.