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

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 A3.lb/LB-2 from Aa3.lb/LB-1, and to A3.lb/LB-2 from A1.lb/LB-1 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 A3.lb 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.