Moody’s lowers outlook on four Lebanese banks; hurt by Syria, Egypt

Moody's Investors Service has lowered to negative from stable the outlook on the bank financial strength ratings (BFSR) and global local-currency (GLC) deposit ratings of four Lebanese banks – Bank Audi, Blom Bank, Bank of Beirut and Byblos Bank.
The changes reflect the slowdown in the Lebanese economy — amidst domestic political uncertainty in H1 2011 and ongoing unrest in neighbouring Syria — which has negatively affected domestic credit conditions and could weaken rated banks' asset quality and profitability, the rating agency said.
All four banks have BFSRs of D- , mapping to a Ba3 on Moody's long-term scale, and Ba3 GLC deposit ratings. The outlook on Byblos Bank's B1 subordinated debt was also changed to negative from stable.
Moody's also changed the outlook on the banks' long-term national-scale ratings (NSRs) to negative from stable.
The banks' long-term foreign-currency deposit ratings were not affected, as they remain capped by Lebanon's B1 ceiling for those deposits.
The negative outlook on the two largest banks — Bank Audi and Blom Bank — also reflects material exposures to Egypt and Syria. Byblos Bank's exposure to countries that have recently experienced political turmoil is more moderate, while Bank of Beirut's is limited.
Broader regional unrest weighs on local business sentiment and the performance of the economy, although the appointment of a new government under Prime Minister Mikati — five months after the collapse of the Hariri government in January — has removed one source of political uncertainty.
The sectors most affected include tourism (which employs around 25% of the workforce) and real estate, both of which have been core drivers of economic and credit growth in recent years. In H1 2011, political uncertainty translated into lower tourist arrivals, while the real-estate sector — which had shown signs of slowdown in 2010 — recorded a contraction in transaction volumes.
As a result, Lebanese economic growth in 2011 is projected to slow to around 2.5% from over 7.0% in the past four years, which will weaken credit conditions in the system. Further deterioration of the political situation in neighbouring Syria would further weaken business sentiment in Lebanon and could disrupt trade flows between the two countries.
Further to the impact that political developments in Syria may have on Lebanon's domestic economy, in recent years the Lebanese banking sector has increased its exposure to Syria. Bank Audi, Blom Bank and — to a lesser extent — Byblos Bank all have exposures in Syria, ranging from 70% to 125% of their Tier 1 capital, as at year-end 2010 (mainly through subsidiaries).
Bank Audi and Blom Bank also have exposures to Egypt, which is expected to experience a sharp economic slowdown in 2011 weighing on banks' asset quality and performance prospects, and where political risk remains elevated amidst the ongoing political transition process.
More positively, all four rated banks have very high liquidity levels and maintain sizable cash placements with international banks. Deposits at all the rated banks have historically exhibited a remarkable resilience during periods of heightened political tension, and inflows are expected to remain positive (albeit at lower levels than in previous years).
At year-end 2010, Bank Audi reported total assets of LBP 43.2 trln (US$ 28.7 bln), Blom bank reported LBP 33.7 trln ($22.4 bln), Byblos Bank reported LBP 23.0 trln ($15.3 bln) while Bank of Beirut reported total assets of LBP 12.0 trln ($8.0 bln).