Moody’s praises banks
for their high liquidity

Deposits are growth driver, but pressure on profitability,

credits, and asset quality lead to negative outlook

The banking system’s funding strengths are expected to remain, along with possible improvements in capitalization, said Moody’s Investors Service in a report published yesterday.

The rating agency said banks will continue to grow their stable deposit funding bases over the outlook period. Customer deposits represent more than 80 percent of system liabilities and are supported by inflows of remittances from the diaspora, which is equivalent to 15-20 percent of the Gross Domestic Product (GDP) on an annual basis.

“The positive growth of deposits is a historical trend,” said Marwan Mikhael, Head of Research at Blominvest Bank. “Although deposits are registering a deceleration of growth by growing at a moderate pace compared to previous years, they are enough to support the economy’s needs,” he said. The Central Bank (BDL) said this week that deposits are growing at an annual rate of six to seven percent in 2015.

Modest capital levels will continue to improve, driven by the phasing-in of Basel III rules, Moody’s said. “Most banks have increased their capital and are heading to meet Basel III requirements before due deadlines,” said Mikhael. Deadlines are set for the end of this year.

However, Moody’s said that despite signs of stabilization in the economy, including a slight rebound in tourism and a net positive impact from low oil prices and the depreciation of the euro, the subdued operating environment will continue to weigh on banks’ performance over the next 12-18 months. As a result, the rating agency's outlook for the country’s banking system remained negative.

Moody’s attributes its outlook to banks’ exposure to public debt and weakened profitability, which remain key challenges. “Banks’ funding of the State keeps the public debt local and contributes to the stability of the economy and financial sector,” said Mikhael. “Profitability is under pressure due to slow growth locally, but some banks are compensating for this weakness from higher revenues abroad,” he said.

The GDP growth will remain weak as political uncertainty will hinder private investment and impair the Government’s ability to enact structural reforms, said Moody's. Real GDP growth will pick up in 2015 to 2.5 percent, compared with two percent in 2014, but will remain below historical trends, it said.

Moody’s also expects the Government to continue to rely on the domestic banking sector for financing, with direct exposure to sovereign debt equivalent to 2.6 times banks’ Tier 1 capital as of April 2015. Weakening in the real estate and construction sectors and softening house prices could lead to renewed asset-quality pressure, it said.