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Rating Action:

Moody's downgrades the ratings of three Lebanese banks, concluding review

25 Feb 2020

Rating action follows downgrade of Lebanon's sovereign rating to Ca

Limassol, February 25, 2020 -- Moody's Investors Service (Moody's) today downgraded the respective long-term local currency deposit ratings of Bank Audi S.A.L., BLOM BANK S.A.L (BLOM BANK). and Byblos Bank S.A.L. to Caa3 from Caa2, and the banks' long-term foreign currency deposit ratings to Ca from Caa3. Concurrently, Moody's also downgraded the banks' long-term local currency Counterparty Risk Ratings (CRR) to Caa3 from Caa1, the long-term foreign currency CRRs to Ca from Caa1, their Counterparty Risk Assessments (CR Assessment) to Caa3(cr) from Caa1(cr), their national scale ratings (NSRs) for deposits to Caa1.lb from B1.lb, the national scale CRRs to Caa1.lb/LB-4 from Baa3.lb/LB-3, and BLOM Bank's long-term foreign currency deposit certificates to Ca from Caa2.

The banks' ca Baseline Credit Assessments (BCAs) and Adjusted BCAs, NP short-term deposit ratings and CRRs, LB-4 short-term NSR for deposits and NP(cr) short-term CR Assessments were affirmed. This rating action concludes the review on the banks' ratings that was initiated at the time of the 7 November 2019 rating action.

Today's rating action follows Moody's downgrade of the Government of Lebanon's issuer rating to Ca, which reflected the rating agency's expectation of a near-term sovereign debt restructuring with potential substantial losses for creditors. For Moody's rating action on the sovereign see, https://www.moodys.com/research/--PR_418596.

Correspondingly, the banks' ratings reflect expected loss for creditors because of banks' high exposure to the Lebanese sovereign and the deteriorating financial and economic conditions in the country, which threaten the sustainability of the peg and may lead to further losses for the banks, particularly for foreign currency liabilities. According to Moody's methodology, bank ratings generally are forward-looking opinions on expected loss for an entity's creditors.

The outlook on the Caa3 local currency deposit ratings and Caa1.lb NSRs has been changed to negative. The outlook on the Ca long-term foreign currency deposit ratings and BLOM Bank's deposit certificates has been changed to stable.

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

RATINGS RATIONALE

-- RISKS TO BANK CREDITORS AMID HIGH LIKELIHOOD OF SOVEREIGN DEBT RESTRUCTURING

Today's rating action is primarily driven by the high likelihood of a sovereign debt restructuring and the deteriorating financial and economic conditions in Lebanon. These raise further solvency and liquidity pressures for Lebanese banks and reflect the heightened risk of expected losses that are consistent with a Caa3 rating for local currency deposits, one notch above the sovereign rating, and Ca for foreign currency deposits in line with the sovereign rating and the corresponding sovereign ceiling. Depositors are the principal indirect creditors to the Ca-rated sovereign and the monetary system, because for years deposit inflows had secured financing for the government and sustained the central bank's foreign currency reserves thereby supporting the Lebanese pound's peg to the US dollar.

Lebanese sovereign Eurobonds have been trading at a deep discount in recent weeks and the likelihood of a debt restructuring has become the rating agency's central scenario with potential substantial losses for private creditors, driving Moody's recent downgrade of Lebanon's sovereign rating to Ca. Such an exercise would likely have material ongoing negative implications for the banks. Lebanese banks' are highly interlinked with the domestic sovereign given their large holdings of government debt and long-term placements at the Banque du Liban (BdL, the central bank). The three rated banks' overall sovereign exposure (including government securities and BdL placements) was equivalent to around 7-to-9 times their Tier 1 capital based on the last-audited year-end 2018 financial statements. Banks' revenues are also heavily reliant on interest income from this sovereign exposure.

Further, financial and economic conditions are deteriorating against the background of large capital outflows, that had accelerated following social protests that started in October 2019, the deepening economic contraction amid restrictions by banks on transfers abroad and cash withdrawals, especially in dollars, and a widening parallel exchange rate compared to the official pegged rate threatening the peg's sustainability. These point to large anticipated economic adjustment costs, that in part may be borne by banks.

Private sector deposits at banks in Lebanon declined in aggregate by $15.7 billion, or 9.1%, in 2019, of which $11.4 billion left the system in the last quarter of the year and despite the informal capital controls implemented by banks. Foreign system liquidity has been centralised at the central bank and the BdL's foreign assets declined to $30.5 billion as of mid-February 2020 from $34.8 billion at the end of 2018. Moody's expects real GDP to contract by 4.5% in 2019, and banks' retail and business loan quality will likely deteriorate because of the economic contraction, higher inflation, job losses and salary cuts. In light of this deterioration, Moody's expects banks would need increase provisions, straining their profitability.

However, banks' funding costs are likely to come down after a recent surge following successive interest rate caps imposed by the BdL on new and renewed Lebanese pound and dollar deposits. On the back of these reductions, banks have also reduced lending rates, which would help limit the rise in problem loans for now. Loans to the private sector by banks in Lebanon were $49.5 billion at the end of 2019 and had contracted by $9.4 billion during the year. Banks are also proceeding with mandated capital increases with some delay. The BdL requested banks to raise capital in the form of US dollar-denominated cash contributions equivalent to a total of 20% of their end-2018 Common Equity Tier 1 capital by end-June 2020 in two stages. Once concluded, these injections will support banks' solvency and liquidity.

Moody's does not currently differentiate between the ratings of the three rated banks, despite some individual solvency and funding differences, because of the systemic nature of the challenges banks are currently facing, their overall very large exposure to the Ca-rated sovereign, and that any further incremental measures taken on deposits by the authorities may be applied universally, similarly to the restrictions that have been applied so far. Some of the ratings are also captured by the relevant sovereign ceilings.

Moody's downgrade to Ca of the long-term foreign currency deposit ratings and foreign currency CRRs of all three Lebanese banks and for BLOM Bank's foreign currency deposit certificates is also driven by the lowering of the sovereign ceilings for foreign currency deposits and bonds to Ca. This deposit ceiling determines the highest rating that may be assigned to deposits held with domestic institutions denominated in foreign currency. The foreign currency bond ceiling generally indicates the highest ratings that can be assigned to a foreign currency denominated security issued, and captures the banks' CRRs and BLOM Bank's certificates.

-- 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 the deteriorating sovereign creditworthiness, capital outflows and declining depositor and investor confidence, and the expected economic adjustment.

-- STANDALONE BCA AND ADJUSTED BCA

The three banks' ca BCAs and Adjusted BCAs continue to reflect central bank requirements introduced in December 2019 for a period of six months. Moody's considered the redenomination into local currency of part of the interest payment for existing foreign currency deposits a deposit default and that a BCA of ca is consistent with such an event.

The BdL's instructions came on top of unofficial restrictions on transfers abroad and dollar withdrawals from deposit accounts announced by the Association of Banks in Lebanon on 17 November, which have been implemented by Lebanese banks. Moody's expects these capital controls to be soon formalised and to be maintained for an extended period of time.

The banks' standalone BCAs are also aligned with the rating of the Lebanese sovereign, which is their main exposure.

-- DEPOSIT OUTLOOKS

The negative outlook on the banks' Caa3 local currency deposit ratings is driven by the high uncertainty regarding the extend of the fiscal and economic adjustment in Lebanon and whether an external support package will be forthcoming that will allow for an orderly adjustment. The negative outlook therefore also incorporates the risk of more negative economic scenarios, including the tail risk of a disorderly de-pegging of the currency that would have very significant implications for the banks.

The stable outlook on the banks' Ca foreign currency deposit ratings reflects the stable outlook on the Government of Lebanon's Ca rating and the high losses already incorporated into that rating.

-- ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

In line with Moody's general view for the banking sector, the three banks have a low exposure to Environmental risks.

Moody's considers that Social risks for the banks have increased and are high. In Lebanon, banks are reliant on private sector deposits. The incremental measures on deposits by both the BdL and the banks will likely diminish depositor confidence and stifle future foreign currency inflows for some time. Banks and the BdL have in some cases been targeted directly by protestors in the country in recent months in light of these restrictions. This breach of depositors' trust could prove detrimental to banks because it challenges the sustainability of the economy's traditional funding model that relied on continued capital inflows, in the absence a new economic structure. Lebanese banks are also closely linked to the sovereign, and the Lebanese government has struggled with social unrest and sectarian divisions, most recently leading to weeks of widespread protests, the resignation of Prime Minister Saad Hariri and an extended delay in forming a new government. Social and sectarian challenges may undermine the chances for a fiscal adjustment, access to external funding support and an economic recovery and lead to further economic losses.

Moody's does not currently have specific concerns around the banks' own governance. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring. Highly dollarised systems such as Lebanon require US banks to clear dollars and are therefore particularly vulnerable to third-party sanctions. Fines or sanctions resulting from non-compliance with international anti-money laundering or combating the financing of terrorism requirements could prove life-threatening for individual banks.

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 negative outlook on the local currency deposit ratings. However, if downside scenarios subside and solvency and liquidity pressures for banks abate together with a relaxation in capital controls and a recovery in confidence could prompt Moody's to change the outlook to stable.

Moody's may downgrade the banks' ratings further if there is increased likelihood of a disorderly sovereign default and a major destabilisation of the currency peg with very large losses for the banks.

LIST OF AFFECTED RATINGS

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

Downgrades:

.... Long-term Counterparty Risk Assessment, Downgraded to Caa3(cr) from Caa1(cr)

.... Long-term Counterparty Risk Rating (Local Currency), Downgraded to Caa3 from Caa1

.... Long-term Counterparty Risk Rating (Foreign Currency), Downgraded to Ca from Caa1

.... NSR Long-term Counterparty Risk Rating, Downgraded to Caa1.lb from Baa3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-4 from LB-3

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa3 from Caa2, Outlook Changed to Negative from Rating Under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Ca from Caa3, Outlook Changed to Stable from Rating Under Review

.... NSR Long-term Bank Deposit Rating, Downgraded to Caa1.lb from B1.lb, Outlook Changed to Negative from Rating Under Review

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed ca

.... Baseline Credit Assessment, Affirmed ca

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

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

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

.... NSR Short-term Bank Deposit Rating, Affirmed LB-4

Outlook Action:

....Outlook, Changed To Negative(m) From Rating Under Review

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

Downgrades:

.... Deposit Note CD/Program, Downgraded to Ca from Caa2, Outlook Changed to Stable from Rating Under Review

.... Long-term Counterparty Risk Assessment, Downgraded to Caa3(cr) from Caa1(cr)

.... Long-term Counterparty Risk Rating (Local Currency), Downgraded to Caa3 from Caa1

.... Long-term Counterparty Risk Rating (Foreign Currency), Downgraded to Ca from Caa1

.... NSR Long-term Counterparty Risk Rating, Downgraded to Caa1.lb from Baa3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-4 from LB-3

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa3 from Caa2, Outlook Changed to Negative from Rating Under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Ca from Caa3, Outlook Changed to Stable from Rating Under Review

.... NSR Long-term Bank Deposit Rating, Downgraded to Caa1.lb from B1.lb, Outlook Changed to Negative from Rating Under Review

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed ca

.... Baseline Credit Assessment, Affirmed ca

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

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

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

.... NSR Short-term Bank Deposit Rating, Affirmed LB-4

Outlook Action:

....Outlook, Changed To Negative(m) From Rating Under Review

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

Downgrades:

.... Long-term Counterparty Risk Assessment, Downgraded to Caa3(cr) from Caa1(cr)

.... Long-term Counterparty Risk Rating (Local Currency), Downgraded to Caa3 from Caa1

.... Long-term Counterparty Risk Rating (Foreign Currency), Downgraded to Ca from Caa1

.... NSR Long-term Counterparty Risk Rating, Downgraded to Caa1.lb from Baa3.lb

.... NSR Short-term Counterparty Risk Rating, Downgraded to LB-4 from LB-3

.... Long-term Bank Deposit Rating (Local Currency), Downgraded to Caa3 from Caa2, Outlook Changed to Negative from Rating Under Review

.... Long-term Bank Deposit Rating (Foreign Currency), Downgraded to Ca from Caa3, Outlook Changed to Stable from Rating Under Review

.... NSR Long-term Bank Deposit Rating, Downgraded to Caa1.lb from B1.lb, Outlook Changed to Negative from Rating Under Review

Affirmations:

.... Adjusted Baseline Credit Assessment, Affirmed ca

.... Baseline Credit Assessment, Affirmed ca

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

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

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

.... NSR Short-term Bank Deposit Rating, Affirmed LB-4

Outlook Action:

....Outlook, Changed To Negative(m) From Rating Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. 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.

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