Overview of the Lebanese Economy and Banking IndustryOverview of the Lebanese Economy and Banking Industry

Presentation to the delegation

of The Banks Association of Turkey

Beirut- December 3, 2010

Dr. Makram SaderSecretary General Association of Banks in Lebanon

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I- Economic Growth

II- Public Finances

III- External Accounts

IV- Financial Intermediation

Real Sector Indicators

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Sources: IMF Article IV- BDL- Economic Accounts of Lebanon- Lebanese customs.

Aggregate Demand and Supply USD billion and %

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Source: Lebanon's Economic Accounts 2008

Public Finances

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Sources: MOF, BDL *Adjusted to include all telecom revenues.

Total debt structure in %

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Source: BDL

Public debt holders* in %

* Estimations

Balance of Payments million USD

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* Estimates - IMF Article IV ** Projections- IMF Article IV*** For Information Sources: IMF- BDL- ABL

Structure of the Banking Industry

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Lebanese Banking Presence Abroad

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Consolidated Balance Sheet of Commercial Banks million USD - End of period

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Source: BDL

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Consolidated Balance Sheet of Commercial Banks change in %

Source: BDL

DollarizationThe net trading position against the Lebanese pound must not exceed

1% of shareholder's equity while the global position cannot exceed 40% of shareholder's equity .

A structural position of 60% of shareholder's equity is authorized to hedge the capital in LBP against fluctuations in the exchange rate .

Banks are required to maintain at least 10% of their foreign currency liabilities as net liquid assets and at least 15% as required and remunerated deposits in FC at BDL .

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Source: BDL

in %

Weighted Average Spread (LBP and FC Markets)

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Source: BDL

Indicators of the Lebanese Banking Sector Performance

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* Cash and deposits at BDL + Treasury bills in LBP & Eurobonds ( with less than 1 year maturity) + foreign assets (excluding claims on non-resident private sector)

Key Prudential Practices

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Minimum capital for new banks

Minimum capital adequacy ratio

Loans to one borrower

Lending to related parties

Liquidity

ratios

LBP 10 billion for the head office

of a commercial bank and LBP 500

million for each additional branch.

LBP 30 billion for establishing an

investment/specialized bank.

LBP 150 billion for establishing an

Islamic bank.

At least 12% of shareholder’s equity to risk-

weighted assets based on Basel II requirements.

- 20% of the bank shareholder’s

equity if the facility is used in Lebanon

or in countries with sovereign rating

A+ and above.

- 10% of the bank shareholder’s

equity if the facility is used in

countries with sovereign rating A and

below.

- The total facilities that each exceeds

15% of the bank’s equity cannot be

larger than 8 times the bank’s equity.

- The total spot operations of clients

debit accounts in FC/credit accounts in

FC & LBP cannot exceed 20% of the

bank shareholder’s equity (under

revision).

Must not exceed 5% of shareholders’

equity since end 2005.

Banks are required to maintain at

least 10% of their Foreign

Currency liabilities as net liquid

assets, and at least 15% as

remunerated deposits at BDL.

Banks have to hold at the BDL as required reserves on Lebanese pound accounts, the sum of 25% of their demand liabilities in LBP and 15% of their term liabilities in LBP. Banks must maintain at least 40% of their shareholders' equity denominated in the Lebanese currency as liquid assets.

Foreign exchange trading

Loan Classification and Provisioning Legal reserve & Provision for General Banking Risk

Basel II standards for regulation and

internal audit

Accounting Practices

The net trading position against the

Lebanese Pound must not exceed

1% of shareholder’s equity while

the global position cannot exceed

40% of shareholder’s equity. A structural position of 60% of shareholder's equity is authorized to hedge the capital in LBP against fluctuations in the exchange rate.

Rules are in conformity with those defined by the Basle Committee on Banking Supervision.

Banks are required to classify their loans into five categories.(standard, watch, substandard, doubtful, bad debt). As by international accounting standards, all non-performing loans (NPLs), have their interest income reserved (unrealized), while provisioning is partial on doubtful debt and integral on bad debt (by decision of the Banking Control Commission - BCC and depending on each individual file). Provisioning is regulated by the monetary authorities and the constitution and freeing of provisions is subject to BCC authorization. Provisions constituted under BCC authorization and supervision are tax deductible.

Banks are required to withhold from

their annual profits at least 0.2% and at

most 0.3% of total risk weighted assets

and contra accounts, i.e total

denominator according to Basel II, as

general banking reserves.

These reserves are an integral part of shareholders' equity and are not tax deductible. Banks must transfer 10% of their annual profits to a legal reserve before the distribution of dividends.

Banks are requested to establish internal audit and control units in accordance with the Principles for the Assessment of Internal Control System issued by the Basle Committee on Banking Supervision. Banks must establish an audit committee the role of which to assist the board of directors in fulfilling its supervisory role, review internal control regulations, and supervise internal audit activities (unit and auditors). Banks must establish a documented mechanism to evaluate capital solvency according to Basel II. Banks must establish corporate governance criteria according to Basel II.

Banks conform to International Accounting Standards (IAS).

Financial Soundness Indicators- Regional comparison (latest available)

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(1)Latest figure: Net Problem Loans/Net Total Loans- IMF Article IV Oct. 2010. (2) Includes provisions against problem loans and general provisions. (3) after taxes. Source: Global Financial Stability Report/IMF, October 2010.

Bank Revenue Composition in % of total- 2009

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Source: R. Ariss' calculations from Bankscope.

Selected Indicators on the Size of the Capital Markets, 2009 (In billions of U.S. dollars unless noted otherwise)

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Source: Global Financial Stability Report/IMF, October 2010.a- Includes Euro area countries, Denmark, Sweden and UK.b- Hong Kong, Korea, Singapore and Taiwan province of China. c - Commercial banks balance sheet

Selected Indicators on the Size of the Capital Markets, 2009 Structure and percentage of GDP

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Source: Global Financial Stability Report/IMF, October 2010. *includes Euro area countries, Denmark, Sweden and UK.* Hong Kong, Korea, Singapore and Taiwan province of China.