Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Credit Libanais’ (CL) Financial Strength Rating (FSR) at ‘BB+’, reflecting the Bank’s good capital ratios, improved non-performing loan (NPL) ratio and comfortable liquidity, with the Bank’s strong retail franchise in Lebanon also acting as a supporting factor. The FSR is constrained by CL’s high exposure to Lebanese sovereign debt, and sensitivity to interest rate and maturity mismatching risks.
The FSR is also constrained by relatively low profitability. Although delinquency ratios have been low, concentration to housing loans (subsidised by the Public Housing Institute) remains a constraining factor. Given Banque du Liban’s (BdL) record of assisting banks, the Support Level is affirmed at ‘3’, reflecting the high likelihood of official support in case of need. The Bank’s Long- and Short-Term Foreign Currency (FC) Ratings, both affirmed at ‘B’, remain constrained by the Sovereign Ratings of Lebanon. The Outlook on all Ratings remains ‘Stable’.
CL occupies a niche position in Lebanon’s crowded banking sector. Although smaller in terms of total assets than its larger rivals, it has consolidated a strong retail banking franchise over the years, with a high component of mortgage and consumer loans, as well as a good base of customer deposits. The Bank’s geographical diversification is more limited than its larger peers, but this has allowed it to avoid problems in Syria and Egypt, and to enjoy good volume growth within the Lebanese market by selectively expanding its corporate business.
CL’s capital adequacy ratio (CAR) has improved following a $100mn preferred share issue in 2013 and stands at a good level, benefiting from the granularity of its loan portfolio, despite a hike in the proposed dividend with respect to last year’s profit. With NPLs decreasing and gross loans expanding at an above average rate, the Bank’s NPL ratio has improved despite the continued economic slowdown; however, loan-loss reserve (LLR) coverage has fallen due to a higher level of write-offs. The level of watch list loans seems to indicate that a rise in NPLs in the current year is possible.
Gross income generation weakened due to lower trading securities income. It is expected that further expansion of CL’s business in Iraq will continue to support growth in Forex and trade finance income. Although the Bank has maintained its operating profitability due to strict cost control and stronger growth in net interest income, the Bank’s net interest margin (NIM) on its local currency business remains pressured by low yields on Treasury bills.
Liquidity remains comfortable, although ratios tightened as the Bank continued to expand its loan portfolio. As is the case with other Lebanese banks, liquidity must be viewed in light of the systemic liquidity and interest rate risks which are characteristic of the Lebanese banking system. Lebanon’s sovereign debt metrics continued to weaken, but are partly mitigated by the country’s external liquidity which remains robust. The security situation in Lebanon has improved since the new Government was appointed in February 2014. However, any political risk event in the region threatening stability within Lebanon could adversely affect banking system deposit growth and the refinancing of public sector debt. Lebanese banks remain the largest holders of sovereign debt.
At end 2013, 63.7% of the Bank’s share capital was held by EFG Hermes. CL offers a diverse range of banking products and services, including corporate banking, trade finance, leasing and insurance. However, the emphasis continues to be on retail where the Bank is one of the leaders in LBP denominated housing loans. In Lebanon, CL operates an extensive nationwide network of 68 branches. The Bank’s international network includes branches in Cyprus and Bahrain, two branches in Iraq (with a third due to be opened in Basra in 2014), a subsidiary in Senegal and a representative office in Montreal. The focus abroad will remain on servicing Lebanese and Arab communities by offering customer deposits and private banking, as well as on intermediating trade and investment flows related to Lebanon.
Senior Credit Analyst
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