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Moody's downgrades 3 Lebanese banks' ratings

LIMASSOL, December 21, 2014

Moody's Investors Service recently downgraded to B2 the long-term deposit ratings of three Lebanese banks: Bank Audi, BLOM Bank  and Byblos Bank.

Concurrently, Moody's lowered the baseline credit assessments of the three banks to b2 from b1 (within the E+ bank financial strength rating category) and downgraded the long-term national scale ratings (NSRs) of Bank Audi and BLOM Bank to Aa3.lb and Byblos Bank to A1.lb. The long-term deposit and national scale ratings have a negative outlook.

The rating action follows the recent Moody's downgrade of Lebanon's government bond ratings to B2 from B1 and reflects Moody's view that the government's weakening creditworthiness weighs on the banks' standalone credit profile given the high credit linkages between their balance sheets and sovereign credit risk and the government's reduced capacity to support banks in case of need.
High correlation with sovereign credit risk

Moody's decision to lower the three Lebanese banks' baseline credit assessments to b2 reflects the extensive interconnectedness between their balance sheets and sovereign credit risk, owing to the banks' high direct exposures to government securities (the government of Lebanon is rated B2 with a negative outlook).

According to Moody's estimates, the banks' direct exposure to government credit risk (investments in government securities and central bank certificates of deposits) stood at around 2.5 times tier 1 capital for Bank Audi, 2.6 times for BLOM Bank and 4.4 times for Byblos Bank as of September 2014.

The high direct exposure to government credit risk, in addition to the primarily Lebanese focus of their operations renders the banks susceptible to event risk at the sovereign level and constrains their baseline credit assessments at the level of the government's bond rating.

Regional geographic diversification ranges from around 10 per cent of assets for Byblos Bank, 23 per cent for BLOM Bank and 45 per cent for Bank Audi, and is not sufficient to offset the risks associated with the banks' credit linkages to the Lebanese sovereign.

Reduced capacity of the government to support banks

The downgrade of the banks' deposit ratings reflects the reduced capacity of the Lebanese government to support the banks in case of need. This is indicated by the weakening of Lebanon's creditworthiness as reflected in Moody's downgrade of the sovereign's bond rating to B2 with a negative outlook, from B1, and is driven by the rise in the country's debt burden, Moody's estimates that Lebanon's 2015 government debt will reach close to 140 per cent of GDP; and the rating agency's forecast that current debt trends are likely to continue to deteriorate in the next two years through a combination of lower growth and ongoing political paralysis, exacerbated by the spillover effects of the Syrian crisis.

The deposit ratings of the three rated Lebanese banks are now rated on par with the government rating and does not benefit from government (systemic) support uplift from their b2 baseline credit assessments.

What could move the ratings down/up

The outlook on the three affected banks' deposit ratings is negative, aligned with the negative outlook on Lebanon's sovereign rating. Moody's would downgrade the banks in the event of a further weakening of the Lebanese sovereign's creditworthiness or in the banks' operating environment; a decline in the banks' loss-absorption capacity, specifically related to their profitability and capital metrics; or any deposit outflows.

Upward pressure on the banks' ratings is limited given the negative outlook. However, improvements in the operating environment and in the sovereign's credit risk profile could prompt Moody's to change the outlook on the three banks' ratings to stable. – TradeArabia News Service




Tags: Ratings | Moody’s |

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