Emerging markets rating agency Capital Intelligence has downgraded the foreign currency ratings of eight Lebanese commercial banks following its latest review of the country’s banking system. Though the overall financial condition of the rated banks is satisfactory, their long-term foreign currency rating was lowered in line with Lebanon’s sovereign downgrade to B from B+.
Lebanon’s banking system as a whole benefits from a sound regulatory and supervisory system and a conservative approach to risk by the banks. However, stagnant economic growth over the last few years has steadily pushed up problem loans at most banks, though adequate provision coverage and the relatively low share of loans in balance sheets mitigate loan quality concerns to some extent.
Profitability in the banking sector has weakened due to the need for higher loan-loss provisioning and the lack of lending opportunities. Earning difficulties has been exacerbated by the trend toward increased deposit dollarization due to public concern over the government’s worsening finances and the sustainability of the exchange rate peg.
The rated banks in Lebanon continue to display strong capital ratios despite stricter official capital adequacy requirements in 2001. The liquidity of these banks has also increased although the bulk of liquidity is in the form of treasury bills and government securities.
In a distress situation where interest rates rise for a prolonged period, the market for these securities would probably prove to be quite illiquid, while banks would be exposed to significant interest rate risk. There is a significant maturity mismatch between assets and liabilities, particularly in local currency. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
