Moody’s assigns D-/B3/NP ratings to Bank of Beirut

Moody’s Investors Service has assigned a D- bank financial strength rating (BFSR) and B3/Not-Prime foreign currency deposit ratings (FCDRs) to Bank of Beirut. The bank has also been assigned a Ba3/Not-Prime global local currency (GLC) deposit rating as well as Aa2.lb/LB-1 Lebanese national scale ratings (NSRs). All ratings carry a stable outlook except for the B3 FCDR, which has a negative outlook in line with the sovereign ceiling for such deposits in Lebanon.

The D- BFSR reflects the bank’s moderate franchise in Lebanon within a highly competitive environment, but also its high sovereign exposure carrying a high level of default risk, a common feature among rated banks in Lebanon. The BFSR also factors in the bank’s relatively high level of problem loans, which were inherited from bank acquisitions it made in the past, as well as the challenging and fragile operating and political environment in Lebanon.

Bank of Beirut exhibits relatively healthy financial metrics, comparable to peer banks in Lebanon, with consistently good profitability levels in recent years. The bank maintains a high level of core liquidity through placements with highly-rated banks outside Lebanon, constituting a natural hedge to any credit events and unfavourable developments that may occur in the country. A fully-owned UK subsidiary provides some level of geographical diversification to the bank’s earning streams and also constitutes the main pillar of a possible expansion in other European countries that have business and economic links with Lebanon.

In assigning the D- BFSR, Moody’s recognises the bank’s aim to further expand in the local market, possibly through an acquisition/merger, further enhancing its franchise and presence in areas where its existing branch network was absent. Moody’s also notes that Bank of Beirut has a strong positioning in the trade finance business among its Lebanese rated peers, with part of this business routed through its onshore branch in Cyprus.

To the extent that Bank of Beirut’s franchise continues to grow, especially in the retail segment, combined with improvement in the bank’s asset quality and a decrease in its overall sovereign exposure, there could be positive pressure on its ratings over the medium-to-longer term. Conversely, there could be negative pressure on the BFSR if the challenging and competitive environment in Lebanon should lead to a material and sustained impairment of the bank’s franchise and profitability, or if asset quality were to deteriorate significantly.

Moody’s concludes that in the event of difficulty, there is a relatively low likelihood that Bank of Beirut would receive support from the financial authorities. This view is based on the bank’s not so high importance to the domestic payments system given its 5.1% deposit market share and on the high level of dollarisation of deposits in Lebanon, constraining the level of external support that could be provided to  systemically important banks.

Given the bank’s D- BFSR, mapping to a Ba3 baseline credit assessment and without imputing any external support, the bank’s GLC deposit ratings are at the same level of Ba3/Not-Prime, while its FCDRs are constrained by the B3/Not-Prime deposit ceiling in Lebanon. The NSRs assigned to the bank of Aa2.lb/LB-1 reflect its relative creditworthiness in the country and are based on its GLC deposit ratings as well as on the imminent capital issue, which will enhance Bank of Beirut’s equity base. National
Scale Ratings rank issuers within a country relative to each other and so do not capture absolute default risk. National ratings isolate systemic risks; they do not address loss expectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the national scale.

Bank of Beirut is headquartered in Beirut, and at the end of September 2007 had total assets of LBP 7,407 billion (US$ 4.9 billion).