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Banks told to raise loan provisions

By Osama Habib

BEIRUT: The Lebanese Central Bank has ordered banks and financial institutions to raise their
provisions on commercial and retail loans, according to Byblos Bank.

In an amended circular issued on Dec. 24, the Central Bank called on banks and financial
institutionsoperating in Lebanon to regularly conduct impairment tests, based on international
standards and Banking Control Commission directives, according to an email from Byblos
Bank’s head of research Nassib Ghobril.

The circular also required banks to use the results of the impairment tests to build collective
provisions against their performing commercial loans portfolios.

“This measure is a stress test to assess the quality of assets and meet the requirements of
Basel III,” Joe Sarrouh, the adviser to the chairman of Fransabank, told The Daily Star.

Banks must also build general reserves against their performing commercial loans portfolio,
equivalent to at least 0.25 percent of a bank’s loan portfolio at the end of 2014, 0.5 percent at the
end of 2015, 1 percent at the end of 2016, and 1.5 percent at the end of 2017. They are exempt
from building general reserves if their collective provisions exceed 0.25 percent of their loan
portfolio by the end of 2014, 0.5 percent at the end of 2015, 1 percent at the end of 2016, and 1.5
percent at the end of 2017. Banks are allowed to include these reserves as part of their Tier One
Capital, the core measure of a bank’s financial strength for regulators.

“The Central Bank is right on the ball. This measure is necessary although it will affect the profits
in general on an accounting basis but these profits will be recuperated,” Sarrouh said. He
suggested that the new provisions are intended for a limited period only and would eventually be
added to lenders’ net income.

“Of course the new provisions will appear in the quarterly and yearly balance sheets of banks.
Nothing will be hidden for the sake of transparency,” he added.

Another banker said the total loans to the private sector were around $50 billion, meaning the 0.5
percent provision would cut profits by $250 million by the end of 2015.

“But these profits will be recovered by the banks eventually. Everything will be explained in the
balance sheets,” the banker said.

The circular also calls on banks to build collective provisions against their performing retail loans
and their retail loans up to 30 days in arrears, again based on impairment tests. These provisions
must be at least equivalent to 0.25 percent of a bank’s retail loan portfolio at the end of 2014, 0.5
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percent at the end of 2015, 1 percent at the end of 2016, and 1.5 percent at the end of 2017.
These provisions exclude housing, student and education loans.

Sarrouh suggested that smaller banks would not be compelled to merge with other banks once
the circular was fully implemented.

“On the contrary, this measure is to maintain the financial strength of all banks in Lebanon,” he
said.

Sarrouh added that the measures were taken around the world in light of the global economic
slowdown.

“It’s true we don’t have a recession in the real sense of the word, but we still need to see a
double-digit growth to reduce the government’s deficit,” he said.

The bankers said the provisions would prompt lenders to keep track of borrowers to ensure there
were no defaults.

“The default ratio is very small in Lebanon ... But we do give a grace period of 30 days if the
borrower did not pay his loan,” one banker said. But he added that the Central Bank would be
unlikely to chase a borrower exceeding the 30-day grace period because of the country’s delicate
economic situation.

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13/01/2015

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