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French Version

Standard & Poor's maintains stable outlook for Lebanese banks

Rating agency warns high debt, political crisis may affect growth

London-based rating agency Standard & Poor's (S&P) maintained its stable outlook of Lebanese banks but warned that the high public debt and fragile political stability may affect the growth if these issues were not tackled.

"The government's high indebtedness, fiscal deficit, and fragile political stability, together with adjustment to these factors, are causing severe constraints on the banking system, "S&P said in its recent report.

It added that the economic risk inherent in their fragile operating environment is the main driver of the ratings on Lebanese banks.

The Lebanese government is still struggling to reduce the $38 billion public debt through a series of measures but the tense political situation and the rift among Cabinet members have caused delayed implementation of the economic reform plans.

"After former Prime Minister Rafik Hariri's assassination on February 14, 2005, the Lebanese economy was virtually put on hold. During the next four months, the country's banking system was under constant and heavy pressure. It showed strong resilience, however," said Standard & Poor's credit analyst Anouar Hassoune.

"The coordinated crisis management by the Banque du Liban, the Banking Control Commission, and the banking community helped restore confidence. The Lebanese pound was not devalued, and although the Central Bank's foreign-exchange reserves shrank dramatically over the crisis period, the risk of the financial system becoming illiquid was avoided."

S&P said Lebanese banks have a number of specific features that make them unique in the Middle East. The most striking characteristic is the size of the banking sector: banks' assets are 3.3 times as large as the country's GDP. The banking system in Lebanon is also heavily dollarized and about 50 percent of assets are made up of Lebanese sovereign risk.

Joe Sarrouh, the adviser to the chairman of Fransabank, told The Daily Star the financial market in Lebanon performed very well in 2005 despite the political rhetoric.

"Overall trading on the Beirut Stock Exchange was very good in the past few months as shares hit all time high," Sarrouh said.

He noted that several Lebanese banks have expanded outside Lebanon and some of them have increased their paid-up capital.

Cairo based EFG-Hermes acquired 20 percent of Banque Audi Saradar Group in a deal worth close to $450 million.

Audi also announced plans to raise the capital to $1.5 billion.

Byblos Bank is also expected to raise its capital by another $300 million or $400 million very soon.

This reflects the limited scale of the retail banking market.

In a less turbulent environment and the clear awareness that using their balance sheets to fund the government's skyrocketing financing needs is unsustainable, some banks are switching to new strategic orientations.

Helped by high-quality management teams and sound regulation designed by a supportive regulator, Lebanese banks are targeting new markets in the region. Lebanese banks have also been cleaning up their balance sheets. Although NPL ratios are still high, they're trend is downward at a sustained pace.

"Given this recent momentum, the banking system's resilience to shocks, and the new political situation following Syria's withdrawal from Lebanon, the rating outlook on Lebanese banks is stable, in line with that on the sovereign," S&P said.

Beirut 16-01-2006
Osama Habib
The Daily Star

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