Sound banking system
despite S&P’s negative outlook

Deposits and currency conversion not at risk

The banking system remains strong, according to industry experts, despite the negative outlook on some banks announced by Standard and Poor’s (S&P).

“In recent years the rating of banks had no negative impact on the depositors’ base,” said Marwan Barakat, Head of Research at Bank Audi.

Standard & Poor’s Ratings Services yesterday revised the outlook from stable to negative on: Bank Audi, BankMed, and Blom Bank. This followed its revision last Friday of Lebanon’s sovereign risk outlook from stable to negative.

The three banks have had sound geographic diversification by regional standards and risk-control strategies since the Syrian outbreak, but S&P believes that they are highly exposed to domestic operating conditions. This includes their large exposure to sovereign risk. “Our ratings on these banks do not exceed those on the sovereign,” S&P report said.

Earlier this week, the Governor of the Central Bank (BDL), Riad Salameh said: “The Central Bank will take initiatives to encourage confidence along with stable interest rates, despite the negative outlook issued by S&P.” He said that deposits have been growing at an annual rate of seven percent and the capital adequacy ratio is 12 percent. “We expect this ratio to reach 15 percent between 2015 and 2018. This is necessary to maintain confidence in our banking sector and to deal with global banking players,” he said.

Resilience to the crisis is also strong. “There are important buffers in the financial system that would convert from lira deposits to the dollar, or potential outflows of capital,” said Barakat. There are two lines of defense, according to Barakat: The first is BDL’s $39 billion in foreign currency reserves, which represent 76 percent of the lira supply, among the highest ratios in the world and the second is liquidity, which represents 41 percent of deposits, compared to 22 percent in emerging markets. “No currency conversion of deposits has been registered to push the BDL to intervene in the market, nor has a decrease in deposits been witnessed,” said Barakat.

A negative rating on Lebanon would lead to a similar action on the three banks, according to S&P. “We would lower the ratings on the three banks if economic growth is slower than we anticipate or if the current political upheaval were to escalate resulting in domestic conflict or acute risks to institutional stability,” according to S&P.

S&P said it would revise the outlook on the three banks to ‘stable’, if it were to take a similar action on the sovereign rating. This could happen if economic growth prospects improved, along with more sustainable public finances and a stable, more predictable, policy-making framework.”