The outlook for Lebanon’s banking system remains negative, Moody’s Investors Service said in a new Banking System Outlook published Wednesday. It added that the main drivers of the outlook are the expectations of weak economic growth and business sentiment in both 2012 and 2013. This weakness is blamed on escalating political unrest and an acceleration in the formation of problem loans related to lending in the domestic market and in countries undergoing political transition or economic slowdown. Declining net profitability, primarily resulting from higher provisioning needs and subdued fee-generation, was also cited. “The operating environment for banks will remain challenging over the 12-18 month outlook period due to weak growth, the poor performance of sectors key to banks’ asset quality and the factious domestic politics,” the report said. Moody’s estimates that real GDP growth will be around 2.0 percent in 2012 and 2.5 percent in 2013, below the 8.1 percent average from 2007. In Moody’s view, the weak growth outlook is underpinned by the precarious security situation in neighboring Syria given the political and economic links, which affect Lebanon’s business sentiment and economic performance. “Moreover, downside risks to growth have increased further following the escalating political unrest domestically, particularly in the aftermath of the recent assassination of Lebanon’s internal security chief Wissam al-Hassan,” Moody’s argued. Moody’s believes that the volatile security situation will affect the performance of key sectors such as trade, tourism, real estate and construction, and that the government’s fiscal position will remain weak, restricting its capacity to provide fiscal stimulus. “This will be exacerbated by factious politics, which will continue to hinder the government’s capacity to enact economic policy or to implement delayed reforms. As a result, Moody’s expects that the banking sector will register weak nominal credit growth and continue to finance the government deficit,” the report said. Moody’s believes that asset quality will remain under pressure. “Problem-loan formation will accelerate, with non-performing loans (NPLs) rising above 6.5 percent of gross loans (from 4 percent at year-end 2011), due to adverse socio-political events, weaker domestic market conditions, as well as banks’ regional exposures (primarily via their Egyptian, Syrian and Jordanian operations),” Moody’s said. It added that Lebanese banks’ high exposure to Lebanese sovereign risk will remain a major source of credit risk over the outlook period, linking the banking system’s health directly to the B1-rated sovereign credit risk. Moody’s expects system-wide profitability to weaken over the coming 18 months owing to higher credit costs, lower fee income generation and lower contribution from the banks’ Syrian operations. As problem loans mount, the rating agency estimates that increases in credit charges to maintain current provisioning coverage will likely erode approximately a quarter of rated banks’ aggregate pre-provision income. Accordingly, Moody’s expects low returns on equity and weak profitability to remain features of the system over the outlook period. From DailyStar