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Rating Action:

Moody's downgrades Lebanese banks' ratings; maintains review for downgrade

07 Nov 2019

Rating action follows recent political developments and the downgrade on the Government of Lebanon's rating

Limassol, November 07, 2019 -- Moody's Investors Service (Moody's) has today downgraded to Caa2 from Caa1, the local-currency deposit ratings respectively of Bank Audi S.A.L. (Bank Audi), BLOM BANK S.A.L. (BLOM Bank) and Byblos Bank S.A.L. (Byblos Bank). The three banks' foreign-currency deposit ratings were downgraded to Caa3 from Caa1, constrained by sovereign ceiling for such deposits. Concurrently, Moody's also downgraded the banks' baseline credit assessments (BCAs) and Adjusted BCAs to caa2 from caa1, their long-term Counterparty Risk Ratings (CRR) to Caa1 from B3, their Counterparty Risk Assessments (CR Assessment) to Caa1(cr) from B3(cr), their national scale ratings (NSRs) for deposits to B1.lb/LB-4 from Baa3.lb/LB-3, the national scale CRR to Baa3.lb/LB-3 from A3.lb/LB-2, and BLOM Bank's long-term foreign currency deposit certificates to Caa2 from Caa1. The banks' NP short-term deposit ratings and CRRs, and NP(cr) short-term CR Assessments were affirmed. All of the banks' long-term ratings, long-term CR Assessments, their BCAs and Adjusted BCAs and the LB-3 NSR CRR remain on review for further downgrade.

The downgrade on the banks' ratings reflects: (1) the weakening creditworthiness of the Lebanese government, reflected in the downgrade of the Government of Lebanon's issuer rating to Caa2 (please see, https://www.moodys.com/research/--PR_412607), owing to the high level of sovereign exposure held on the banks' balance sheets; (2) strained systemic funding and liquidity conditions in view of the increased political uncertainty facing the country; and (3) a deterioration in the operating environment for banks, which led Moody's to lower the Macro Profile it assigns to Lebanon to 'Very Weak' from 'Very Weak +'.

Moody's downgrade to Caa3 of the three Lebanese banks long-term foreign-currency deposit ratings is driven by the lowering of the sovereign ceiling for foreign-currency deposits to Caa3.

The review for further downgrade on the banks' ratings will focus on potential further deterioration of the sovereign's credit quality and potential further pressure on the system's liquidity. The review on banks' BCAs and Adjusted BCAs will also consider the likelihood of more systematic limitations for depositors in freely and fully accessing their funds.

A full list of affected ratings and assessments is provided towards the end of this press release.

RATINGS RATIONALE

-- WEAKENING SOVEREIGN CREDITWORTHINESS AND CREDIT LINKAGE WITH BANKS

The Lebanese government's weakening creditworthiness is adversely affecting the three banks' own creditworthiness given their large exposure to the Lebanese sovereign, which is their main source of risk.

The three banks' overall sovereign exposure (including government securities and placements at the central bank of Lebanon, Banque du Liban or BdL) was equivalent to around 7-to-9 times their Tier 1 capital and more than half of the banks' assets based on their audited year-end 2018 financial statements. This exposure links the banks' creditworthiness with that of the heavily-indebted Lebanese government. These sovereign holdings also expose the banks to liquidity and interest rate risks because their long-term maturities create a mismatch with the shorter maturities of customer deposits, the banks' main liabilities. In addition, the three banks continue to be exposed to the challenging Lebanese operating environment, despite varying levels of geographical diversification, which also indirectly exposes them to sovereign event risk.

-- HEIGHTENED FUNDING AND LIQUIDITY RISKS

Moody's considers that funding and liquidity conditions and risks for Lebanese banks have deteriorated in view of political uncertainty and social unrest following more than two weeks of national protests that led to the resignation of Prime Minister Saad Hariri and an extended closure of banks to the public for security reasons.

In Moody's view, this uncertainty increases the downside risk of deposit outflows from Lebanon, or, conversions into dollars, and a period of limited new deposit inflows and higher rates that banks need to pay for deposits. This is testing the sustainability of the economy's traditional funding model that relies on continued capital inflows and bank deposit growth in order to secure financing for the government, and sustain the central bank's foreign currency reserves that help support the Lebanese pound's dollar peg and the country's financial stability. The current political instability could also lead to extended delays in the government's policy adjustment and reform efforts that would restore confidence and support a broader economic growth recovery, and that are required to achieve a reduction in the need for these continuous large inflows of deposits and any reduction in deposit interest rates.

Political shocks in Lebanon have typically been followed by a contraction in deposits and a rise in deposit dollarisation. The banking sector saw an outflow of $2.6 billion in private sector deposits during November 2017 when the then Prime Minister Saad Hariri temporarily resigned, although inflows subsequently resumed. Lebanese banks also faced significant monthly deposit outflows in January, May and September this year. In aggregate, private sector deposits at banks in Lebanon declined by $4.3 billion, or 2.5%, in the nine months to September 2019. This was a break from previous periods, by comparison deposits had continued to grow annually throughout 2001 to 2018. Deposit dollarisation increased to 73% in September 2019, a level last-seen in 2008, signifying declining depositor confidence and declining confidence in the currency peg. The rates that banks pay on new deposits have also increased significantly during 2019.

Moody's views positively the reopening of branch based deposit activity after the approximately 2 week closure where transactional activity was limited to cash machines and electronic banking. We observe that a reinstitution of such measures coupled with more systematic limitations for depositors to freely and fully access their funds would be considered an event of default.

-- FOREIGN-CURRENCY DEPOSIT RATINGS

Moody's downgrade to Caa3 of the long-term foreign-currency deposit ratings of all three Lebanese banks is driven by the lowering of the sovereign ceiling for foreign-currency deposits to Caa3. This ceiling determines the highest rating that may be assigned to deposits held with domestic institutions denominated in foreign currency, and reflects the risk that a government would intervene in some way to constrain deposit holders' access to their foreign currency deposits. The rating agency's general approach is to set the foreign currency deposit ceiling at or below a sovereign's foreign currency bond rating.

-- LOWER MACRO PROFILE

Moody's has also lowered its Macro Profile for Lebanon to 'Very Weak' from 'Very Weak +' previously. The rating agency considers that the operating environment for banks in Lebanon has deteriorated in view of recent political developments and the effect that these developments will have on depositors' confidence. Moody's also considers that the political uncertainty will lead to a further delay in implementing much-needed structural and institutional reforms, and therefore lead to more negative economic scenarios.

-- REVIEW FOR FURTHER DOWNGRADE

The review for downgrade on the banks' ratings reflects, firstly, the review for downgrade on the Lebanese government's Caa2 rating and therefore the further downside pressure on the sovereign's creditworthiness. Secondly, the review for downgrade also reflects potential additional downside risks from a sustained decline in depositor confidence, which would lead to significant stress on the banks' funding and liquidity and therefore on the central bank's reserves and the stability of the peg, which would in turn result in large additional negative implications for Lebanese banks.

The review on banks' BCAs and Adjusted BCAs will also consider the emergence of any formal restrictions for depositors in freely and fully accessing their funds. Limitations to deposit withdrawals or transfers would be considered by Moody's as an event of default for the banks' standalone assessments.

-- WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's considers that there is limited upward pressure on the affected ratings at present, as indicated by the review for downgrade. However, improvements in the sovereign's risk profile and a period of renewed deposit inflows and demonstrated recovery in confidence could prompt Moody's to confirm the three bank ratings at current levels.

A downgrade of the Lebanese government would exert negative pressure on the banks' ratings. Moody's may also downgrade the banks' ratings in the event of large deposit outflows in Lebanon that severely challenge the financial sector's ability to meet its obligations, finance the government and potentially place pressure on the peg's stability, thereby severely jeopardising financial stability. A heightened risk of capital controls in general, or, any restrictions on depositors' full contractual access to their funds may cause the rating agency to downgrade the banks' BCAs to a lower level.

LIST OF AFFECTED RATINGS

..Issuer: BLOM BANK S.A.L.

Downgraded and Placed On Review for Further Downgrade:

.... Adjusted Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Long-term Deposit Note/CD Program, Downgraded to Caa2 from Caa1, Outlook Remains Ratings Under Review

.... Long-term Counterparty Risk Assessment, Downgraded to Caa1(cr) from B3(cr)

.... Long-term Counterparty Risk Ratings, Downgraded to Caa1 from B3

.... NSR Long-term Counterparty Risk Rating, Downgraded to Baa3.lb from A3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-3 from LB-2

.... NSR Long-term Bank Deposit Rating, Downgraded to B1.lb from Baa3.lb, Outlook Remains Ratings Under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Caa3 from Caa1, Outlook Remains Ratings Under Review

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa2 from Caa1, Outlook Remains Ratings Under Review

Downgraded:

.... NSR Short-term Bank Deposit Rating, Downgraded to LB-4 from LB-3

Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Ratings, Affirmed NP

.... Short-term Bank Deposit Ratings, Affirmed NP

Outlook remains unchanged at Ratings under Review

..Issuer: Bank Audi S.A.L.

Downgraded and Placed On Review for Further Downgrade:

.... Adjusted Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Long-term Counterparty Risk Assessment, Downgraded to Caa1(cr) from B3(cr)

.... Long-term Counterparty Risk Ratings, Downgraded to Caa1 from B3

.... NSR Long-term Counterparty Risk Rating, Downgraded to Baa3.lb from A3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-3 from LB-2

.... NSR Long-term Bank Deposit Rating, Downgraded to B1.lb from Baa3.lb, Outlook Remains Ratings under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Caa3 from Caa1, Outlook Remains Ratings under Review

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa2 from Caa1, Outlook Remains Ratings under Review

Downgraded:

.... NSR Short-term Bank Deposit Rating, Downgraded to LB-4 from LB-3

Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Ratings, Affirmed NP

.... Short-term Bank Deposit Ratings, Affirmed NP

Outlook remains unchanged at Ratings under Review

..Issuer: Byblos Bank S.A.L.

Downgraded and Placed On Review for Further Downgrade:

.... Adjusted Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Baseline Credit Assessment, Downgraded to caa2 from caa1

.... Long-term Counterparty Risk Assessment, Downgraded to Caa1(cr) from B3(cr)

.... Long-term Counterparty Risk Ratings, Downgraded to Caa1 from B3

.... NSR Long-term Counterparty Risk Rating, Downgraded to Baa3.lb from A3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-3 from LB-2

.... NSR Long-term Bank Deposit Rating, Downgraded to B1.lb from Baa3.lb, Outlook Remains Ratings under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Caa3 from Caa1, Outlook Remains Ratings under Review

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa2 from Caa1, Outlook Remains Ratings under Review

Downgraded:

.... NSR Short-term Bank Deposit Rating, Downgraded to LB-4 from LB-3

Affirmations:

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Ratings, Affirmed NP

.... Short-term Bank Deposit Ratings, Affirmed NP

Outlook remains unchanged at Ratings under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1174796.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alexios Philippides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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