Moody’s cuts local currency ratings of Lebanese banks, foreign deposits upgraded

Moody's Investors Service has taken a number of rating actions on four Lebanese banks – it has downgraded to Ba3 from Ba2 the long-term global local currency (GLC) deposit ratings of Bank Audi, BLOM Bank and Byblos Bank, while the outlook on foreign currency deposit ratings of Bank Audi, BLOM Bank, Byblos Bank and Bank of Beirut has been changed to ‘positive’ from ‘stable’.
The outlook on Byblos Bank's senior unsecured debt rating has also been changed to ‘positive’ from ‘stable’.
The downgrades conclude a review that Moody's initiated on these ratings on May 27, prompted by its reassessment of the Lebanese government's ability to provide support to its banking system. Their bank financial strength ratings (BFSRs) are unaffected.
Moody's believes that, like most governments, the Lebanese authorities are at least as likely to support their banking system as they are to service their own debt — a view that has traditionally led to bank ratings benefiting from significant uplift. However, given the co-dependence between the banking sector and government finances in Lebanon and the likelihood that stress in the system would predominantly arise in the event of an inability of the government to service its debt, Moody's believes that greater weight should be attributed to the government's rating as a measure of public support for the country's banks.
Consequently, Lebanon's systemic support indicator is now set at B1, one notch above the government's B2 local currency bond rating (rather than the local currency deposit ceiling).
Moody's assessment of the probability that the authorities would extend support in case of need is unchanged for these three banks: at 'high' for both Bank Audi and BLOM Bank and 'moderate' for Byblos Bank. However, the B1 systemic support indicator is not high enough to provide any uplift to the three banks' GLC deposit ratings from their baseline credit assessments (BCAs), which are Ba3 for each bank (mapping from their D- BFSRs).
Despite improvements in Lebanon's operating environment – amelioration of the political situation, solid economic growth in 2009 and brisk growth in customer deposits driving the improved ability of the country's banking system to finance the government's fiscal deficits – banking and government finances remain co-dependent, with sovereign exposures constituting local banks' largest credit concentration. As a result, recent improvements not withstanding, the four Lebanese banks' D- BFSRs (mapping to a BCA of Ba3) remain restricted by their respective large exposures to Lebanese sovereign risk and continue to carry a stable outlook.
Positive pressure on the ratings could develop if the currently more consensual political environment is sustained and if Lebanese banks' risk continues to diversify away from the sovereign – either through the continuation of their regional expansion or domestically.