The outlook on Lebanon's banking system has been changed to negative from stable, said Moody's Investors Service in a new report entitled “Banking System Outlook: Lebanon” released Monday. The key drivers of credit risk within this system are (i) slower economic growth, following a sharp GDP deceleration in H1 2011; (ii) downside economic risks due to regional political uncertainty, particularly in Syria; and (iii) the banks' asset and loan exposures to other regional countries experiencing political unrest and/or economic slowdown, such as Egypt and Jordan. Although non-performing loans (NPLs) improved during 2006-10, it is now more likely that this trend will reverse. In addition to the weakened domestic operating environment conditions, the banks (predominantly the larger ones) have material exposures to countries undergoing political transition or experiencing political unrest (particularly Syria and Egypt). Moody's therefore expects that the political unrest and the broader economic slowdown in other neighboring countries (e.g., Jordan), will exert upward pressure on problem-loan trends, at least into H1 2012. The rating agency expects the banks' profitability to come under pressure over the outlook horizon, as subdued business activity will likely cause a slowdown in credit growth and fee-generating income. Combined with historically low interest rates and potential upward pressure on funding costs, Moody's expects the slowdown to exert pressure on banks' pre-provision income. The Lebanese banking system is highly exposed to Lebanon's sovereign debt (rated B1, stable). Government debt on banks' balance sheets stood at a very high 3.4 times the system's aggregate Tier 1 capital at year
