Moody's Investors Service has lowered all rated Lebanese Banks' (Banque Audi, BLOM Bank & Byblos Bank) long-term foreign currency deposit ratings from B2 to B3, at the same level as, and constrained by, the new foreign currency deposit country ceiling. In addition, Byblos Bank's foreign currency senior and subordinated bond ratings and BLOM Bank's foreign currency subordinated debt ratings were downgraded from B1 to B2. These debt ratings are placed a notch higher than Lebanon's B3 government debt ratings, in line with Moody's policy to allow certain favoured classes of obligors to pierce their respective country debt ratings.
The rating agency notes that the rating downgrades follow a similar recent sovereign rating action on the Lebanese government debt, reflecting the country's political turmoil and the negative impact that this has on both the macro-economic environment and the country's financial system. All deposit and debt ratings carry stable outlooks.
Moody's foreign currency debt ratings of Lebanese banks, which continue to pierce the country's debt ceiling, reflect the likelihood of a moratorium on foreign currency and the probability that the banks' debt instruments will be caught up in such a moratorium. The significant importance of the banking sector to the country's economy is likely to lead to favourable treatment from the Lebanese financial authorities in an extreme stress scenario.
The financial strength ratings (FSRs) of all three banks were also downgraded, to D with a negative outlook from D+ with a negative outlook. Moody's notes that these banks, which are highly exposed to the sovereign, either directly through holdings of government securities or indirectly through holdings of Banque du Liban's (Lebanon's Central Bank) CDs, have now riskier classes of assets on their balance sheets representing several multiples of the banks' shareholders' equities. Such high exposure to a B3 rated credit has negative implications for the banks' economic capital and has become inconsistent with D+ FSRs, thus warranting this rating action.
Moody's expects the banks' profitability in the current fiscal year to be under pressure given that the Lebanese Pound (LBP) part of the balance sheet, which has traditionally been the main driving force behind profitability, will be hit due to the recent rise in LBP deposit interest rates across the banking system. However, Moody's understands that recent debt swap operations of Banque du Liban with the banks are likely to alleviate to a certain degree such profitability pressure. Asset quality is also expected to be negatively impacted from the recent political developments in the country since certain key sectors and businesses are likely to experience a slowdown.
Lebanese banks have historically been resilient to severe shocks including the one the country is currently going through. Such resilience stems from the fact that Lebanese banks are well managed, they maintainsignificant core liquidity and the banking system operates under an effective monetary and regulatory environment. In addition, the depositors' confidence in the banking system has been a key factor to its stability and underpins the banks' D FSRs. The recent wave of deposit conversions from Lebanese Pounds (LBP) to foreign currency, as well as the outflow of deposits abroad, has had so far only a limited negative impact on these banks' core liquidity positions. However, the future stability of the banking system will continue to rely to a great degree on market and depositors' confidence, which in turn will depend on how the political situation will evolve going forward.
At the moment the predictability of such confidence is low and the negative outlook reflects the uncertainty regarding the financial health of these banks in the foreseeable future. A further FSR downgrade may take place if the political instability is prolonged and if events lead to an acceleration in the erosion of confidence. Conversely, a rapid resolution of the political situation and a revival of the country's economic activity may exert positive pressure on the ratings, Moody's concludes.
BLOM Bank is headquartered in Beirut and had total assets of LBP16,356 billion (US$10.9 billion) at the end of December 2004.
Banque Audi is headquartered in Beirut and had total assets of LBP15,794 billion (US$10.5 billion) at the end of December 2004.
Byblos Bank is headquartered in Beirut and had total assets of LBP10,491 billion (US$7 billion) at the end of December 2004.