Regional investment bank EFG Hermes indicated that the share prices of the three largest listed Lebanese banks are currently the most attractive in the Middle East & North Africa region given that their valuations have been negatively impacted by domestic political uncertainties and the armed conflict in Syria, which have strongly weighed on economic sentiment in Lebanon. It said the banks' projected price-to-earnings ratio of 5.5 and price-to-book value of 0.9 for 2012 incorporate a pessimistic outlook on credit quality deterioration in Syria, and anticipated that security risks in Lebanon linked to the conflict in Syria will limit further increases in the banks' valuations.
EFG Hermes expected the banks' earnings to remain flat in 2012 as they continue to take provision for their Syrian exposure following strong provisioning last year. It said that banks operating in Lebanon will continue to use all their operating profits at their Syrian affiliates to strengthen their collective provisions.
In parallel, EFG Hermes indicated that the banks' net interest spreads are highly sensitive to US dollar rates due to the high dollarization rate of deposits; the banks' strong US dollar-denominated liquidity, with interbank assets accounting for around 20% of the sector's aggregate; and deposit interest rates historically above the LIBOR rate to reflect the fragile macroeconomic and political environment.
It said that pressure on net interest spreads has been stable so far this year as banks have offset pressure on asset yields with lower funding costs by transferring partially lower LIBOR rates to their deposit base. It did not expect a strong increase in margins in 2012 and 2013, as higher spreads are linked to higher US dollar interest rates and as global interest rates on the dollar are expected to remain at their current low levels.
Lebanon This Week – Byblos Research