Political risk weigh heavy on Lebanese banks

The excessive exposure of Lebanon\'s banks to the government debt, huge dependence on foreign deposits for funding and the protracted political turmoil in the neighbouring Syria are expected to weaken the balance sheet strength of majority of Lebanese banks, according to analysts and rating agencies. \"Lebanese banks have a long-term vulnerability to their dependence on foreign depositors and on Lebanon\'s debt-servicing capacity, the London-based Economist Intelligence Unit said in a recent report. Most foreign investors have avoided Lebanon\'s bond market because of its bulging debt. The nation\'s debt is equivalent to 134 per cent of economic output, the highest in the Arab world, according to the IMF data. Lebanese banks hold about 70 per cent of the nation\'s debt which is rated B1 by Moody\'s Investors Service, four notches below investment grade, and B by Standard and Poor\'s, the fifth highest junk rating. Article continues below Negative outlook Last week Moody\'s Investors Service changed its rating outlook to negative from stable on the standalone bank financial strength ratings and global local-currency deposit ratings of four Lebanese banks — Bank Audi; Blom Bank; Bank of Beirut; and Byblos Bank. \"The negative outlook on the system\'s two largest banks — Bank Audi and Blom Bank — also reflects material exposures to Egypt and Syria. Byblos Bank\'s exposure to countries that have recently experienced political turmoil is more moderate, while Bank of Beirut\'s is limited,\" Moody\'s said in its rating update. Analysts see domestic and regional political uncertainty to put pressure on Lebanese banks\' performance, but for the second quarter bond gains are expected to help the bottomlines. \"For the Lebanese banks we expect single digit revenue growth, as we continue to see realised bond gains helping net earnings in the second quarter,\" said Jaap Meijer, Head of Banks Research and senior analyst AlembicHC. Rating agencies such as Moody\'s see broader regional unrest weigh on local business sentiment and the performance of the economy, although the appointment of a new government under Prime Minister Mikati — five months after the collapse of the Hariri government in January 2011 — has removed one source of political uncertainty. The sectors most affected include the tourism industry (which directly and indirectly employs around 25 per cent of the local workforce) and real estate, both of which have been core drivers of economic and credit growth in recent years. Exports to Syria fell 17 per cent in the first five months of this year compared with the same period a year earlier. The budget deficit jumped 41 per cent to 1.83 trillion Lebanese pounds (Dh4.40 billion), the Finance Ministry said in July. In the first half of 2011, political uncertainty translated into lower tourist arrivals, while the real-estate sector — which had shown signs of slowdown in 2010 — recorded a contraction in transaction volumes. As a result, Lebanese economic growth in 2011 is projected to slow to around 2.5 per cent from over seven per cent in the past four years, which will weaken credit conditions in the system. Analysts said further deterioration of the political situation in neighbouring Syria would almost certainly weaken business sentiment in Lebanon and could disrupt trade flows between the two countries. Increased uncertainties, both domestic and regional, affect Lebanese banks\' operating environment and heighten the risks to their asset quality and performance. Lebanese banks are majority holders of the Middle East\'s lowest-rated bonds, may be at risk should Syria\'s popular uprising hurt Lebanon\'s political stability and economic growth. Rating agencies said leading Lebanese banks\' portfolios of low-rated Lebanese government securities are several times their respective Tier 1 capital levels. This represents a systemic issue, whereby the banking sector effectively funds high Lebanese public debt.