No credit bubble expected in the market

Debt ratios relatively stable

The exposure of banks to sovereign debt has been stable in the past few years, in spite of an increase in the amounts borrowed by the State. The financing share of the public sector of the banks’ lending portfolio is decreasing in favor of the private sector.

The share of the banks in overall loans was relatively stable in the past three years: It represented 44 percent in 2013, 41.7 percent in 2012, and 42.6 percent in 2013. The share of the private sector reached 56 percent, 58.3 percent, and 57.4 percent, respectively over the same period.

“Banks have committed not to increase their exposure to financing the public sector in the light of continuous high deficit and debt,” said George Aouad, Advisor to the Chairman at First National Bank. “Shortages in bank subscriptions in treasury bills are being covered by the Central Bank (BDL) and individual investors,” he said.

Loans to the public sector totaled $37.6 billion in 2013, compared to $31.1 billion in 2012, and $29.2 billion in 2011. In parallel to the increase of loans to the public sector, the size of loans to the private sector have increased due to the increase of banks’ assets. “This is a positive sign that banks are heading more toward financing the private sector,” said Marwan Barakat, Head of Research at Bank Audi. “It is a healthy economic phenomenon that stimulates growth in different sectors,” he said.

The exposure of banks is lower in lira denominated debt rather than in foreign currency. It represented 41.5 percent in 2013, and 43 percent as at the end of September 2014. “There is no default risk in lira since the State is able to guarantee the coverage when the matter is related to the local currency,” said Barakat.

The exposure on debt in foreign currency is riskier. The ratio of Sovereign Eurobonds to deposits in foreign currency was almost 16 percent in 2013.

The Government is planning to issue a $450 million Eurobond, by the end of this year, to meet funding needs. It is also planning to issue a $4.4 billion Eurobond for 2015-2017.

The Association of Banks in Lebanon (ABL) recently said: “Banks are ready to finance the bonds related to due public debt and not the new subscriptions that may increase the deficit of the budget and increase the value of the public debt.” According to the ABL, most banks have decided not to increase their portfolio of debt in foreign currencies. Public debt narrowed to $66 billion, at the end of September.

The interest rates on Treasury bills in lira and Eurobonds are relatively high. In its May Eurobond issue, Lebanon sold its long-term, ten-year treasury bonds at the interest rate of 7.28 percent.

“Interest rates on bonds are on average six percent. It is an acceptable rate if we take into consideration the duration of the bonds and their links to LIBOR globally,” said Aouad.

Although banks’ appetites are usually high to subscribe in Treasury bills and Eurobonds, Barakat said: “Interest rates should not be lowered, especially that we have a deficit in the balance of payment since 2011 and it’s important to have a stimulus to guarantee the money inflow to the country.”

“If we exclude loans to non-resident clients and loans covered by cash collaterals, loans to the private sector would represent 70 percent of the Gross Domestic Product (GDP),” said Barakat. “The market is far from having a credit bubble. “BDL is only taking cautious measures for the future,” he said.