Moody’s drops three Le­banese banks to B3 ‘sta­ble’

Financial Mirror (Cyprus) - - FRONT PAGE -

Moody’s In­vestors Ser­vice has down­graded to B3 from B2 the long-term de­posit rat­ings of three Le­banese banks: Bank Audi S.A.L., BLOM BANK S.A.L. and By­b­los Bank S.A.L. Con­cur­rently, Moody’s down­graded the base­line credit as­sess­ments (BCAs) of the three banks to b3 from b2 and their long-term Coun­ter­party Risk As­sess­ments (CR As­sess­ments) to B2(cr) from B1(cr). The rat­ing agency also down­graded Bank Audi’s and BLOM Bank’s na­tional scale rat­ings (NSRs) to from, and to from for By­b­los Bank.

The out­look on the long-term de­posit rat­ings and NSRs has changed to ‘sta­ble’ from ‘neg­a­tive’.

The rat­ing ac­tion is prin­ci­pally driven by Moody’s down­grade of Le­banon’s gov­ern­ment bond rat­ings to B3 sta­ble from B2 neg­a­tive on Au­gust 25, and re­flects the rat­ing agency’s view that the gov­ern­ment’s weak­ened cred­it­wor­thi­ness (re­flected in the down­grade of its rat­ing and mainly driven by the rise in the coun­try’s debt bur­den) weighs on the banks’ stand­alone credit pro­file given the high credit link­ages be­tween their bal­ance sheets and sov­er­eign credit risk.

Moody’s de­ci­sion to down­grade the three Le­banese banks’ stand­alone BCAs to b3, and their long-term de­posits rat­ings to B3, re­flects the ex­ten­sive in­ter­con­nect­ed­ness be­tween their bal­ance sheets and sov­er­eign credit risk. Banks’ high di­rect ex­po­sure to the gov­ern­ment, in ad­di­tion to the pri­mar­ily Le­banese fo­cus of their op­er­a­tions ren­ders the banks sus­cep­ti­ble to event risk at the sov­er­eign level and con­strains their BCAs at the level of the gov­ern­ment’s bond rat­ing.

Ac­cord­ing to Moody’s es­ti­mates, the banks’ over­all ex­po­sure to gov­ern­ment credit risk (in­clud­ing in­vest­ments in gov­ern­ment se­cu­ri­ties, and cen­tral bank cer­tifi­cates of de­posits and non-re­serve place­ments with the cen­tral bank) stood at around 4.8 times Tier 1 cap­i­tal for Bank Audi, 5.2 times for BLOM Bank and 6.5 times for By­b­los Bank as of year-end 2016. Re­gional ge­o­graphic di­ver­si­fi­ca­tion ranges from around 5% of as­sets for By­b­los Bank, 18% for BLOM Bank and up to 41% for Bank Audi as of end-June 2017, and is not suf­fi­cient to fully off­set the risks as­so­ci­ated with the banks’ credit link­ages to the Le­banese sov­er­eign.

The banks’ B3 long-term de­posit rat­ings are only driven by the po­si­tion­ing of their BCAs and do not ben­e­fit from gov­ern­ment sup­port up­lift, given that their stand­alone BCAs of b3 are on par with the gov­ern­ment’s B3 rat­ing. com­par­a­tively high per capita in­come.

Although tourism is ex­pe­ri­enc­ing a re­vival, ac­tiv­ity in other key sec­tors such as con­struc­tion and real es­tate is still sub­dued and the rat­ing agency ex­pects that stronger eco­nomic re­cov­ery and a re­cov­ery in in­vestor con­fi­dence will re­quire a pe­riod of tan­gi­ble re­forms as a cat­a­lyst. There­fore credit con­di­tions for banks re­main chal­leng­ing. Moody’s also con­sid­ers pri­vate-sec­tor credit of around 110% of GDP as of year-end 2016 as high com­pared to other emerg­ing mar­kets, while to­tal bank­ing sys­tem as­sets equalled al­most four-times GDP as of year-end 2016, one of the high­est glob­ally, driven by banks’ large sov­er­eign ex­po­sures.

The sta­ble out­look on the banks’ rat­ings also re­flects the rat­ing agency’s ex­pected sta­bil­i­sa­tion of the op­er­at­ing con­di­tions for banks in Le­banon. liq­uid­ity pro­file and sta­ble, pre­dom­i­nantly re­tail de­posit­based, fund­ing struc­ture. BLOM Bank’s share­holder’s eq­ui­tyto-to­tal as­sets of 8.6% as of end-June 2017 is stronger than its do­mes­tic peers, but Moody’s con­sid­ers that this level of cap­i­tal is only mod­er­ate given the still chal­leng­ing do­mes­tic op­er­at­ing en­vi­ron­ment and high sov­er­eign ex­po­sure.

BLOM Bank’s long-term and LB-2 short-term Le­banese NSRs re­flect its strong rel­a­tive cred­it­wor­thi­ness within the Le­banese credit en­vi­ron­ment. BLOM Bank’s NSRs re­flect its es­tab­lished mar­ket po­si­tion and strong prof­itabil­ity and cap­i­tal­i­sa­tion com­pared to do­mes­tic peers, but also its rel­a­tively lim­ited ge­o­graphic di­ver­si­fi­ca­tion.

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