Moody's downgrades Lebanese banks' FSRs to D-

The three banks' FSRs were placed on review for a possible downgrade in July 2006 following the outbreak of the Israel-Hezbollah conflict. The outlook for the banks' foreign currency deposit (B3) and debt (B2) ratings has also changed, to negative from stable, while the outlook on the new FSRs is now stable.

This rating action was triggered by the recent political tensions in the country subsequent to the resignations of six cabinet ministers and the assassination of another. As a result, Moody's has recently changed to negative the outlook on Lebanon's B3 foreign currency government bond rating as well as on the respective foreign currency bond (B2) and
deposit (B3) country ceilings. According to Moody's sovereign rating rationale, the current political tensions are likely to undermine the
government's standing, further calling into question its ability to implement much-needed economic reforms.

According to Moody's, the three rated Lebanese banks are heavily exposed to Lebanese sovereign risk, either directly or through placements with
the central bank (Banque du Liban - BdL) that is itself highly exposed to the sovereign, which now has a B3 rating with a negative outlook. Such a rating implies a high degree of political and economic risk, and is only marginally above the Caa1 rating level. Concurrently, Moody's considers that a 'D' FSR, which on a stand-alone basis maps to a Ba2 rating, is no longer consistent for banks having around a third of their total assets and multiple times of their equity invested in such a very low grade
investments with very weak creditworthiness. This has inevitably raised the banks' overall risk profile, and has undermined their economic solvency, warranting a lower FSR.

Moody's notes that despite the high current liquidity of banks, some degree of liquidity risk should be considered in the event that the political situation deteriorates further compromising depositors' confidence. Deposit conversions from local currency to foreign currency combined with deposit transfers outside the country is a likely scenario that could stretch the banks' liquidity positions and resources. Although past political shocks have been absorbed by the banking system through
the banks' high liquidity levels and with BdL's coordination and liquidity mechanism, the current situation appears relatively more
serious, with a high level of uncertainty that could leave the banks vulnerable to a potential significant capital flight.

In addition, some repercussions on the banks' asset quality are expected to gradually surface as a result of the month-long conflict that took
place in July-August 2006 which caused a severe degree of destruction of the country's infrastructure. Higher level of problematic loans, increased provisions and loan rescheduling are expected to arise primarily due to the resulting economic slowdown. However the expected levels of non-performing loans are likely to remain consistent with those of similarly rated banks, particularly given the banks' low loan exposures which on average are less than 25% of their total balance sheet
size.

At the same time, Moody's notes that banks are likely to continue to be profitable considering the high-yielding instruments obtained by BdL in
exchange for immediate liquidity to facilitate depositors' needs during the recent crisis. The foreign currency part of their balance sheets is
now more profitable on the back of rising US$ interest rates. Efforts by the banks to diversify their assets and the relevant risks away from Lebanon by expanding in the Middle East & North Africa (MENA) region are steps in the right direction, although not yet significant enough to minimise the Lebanese sovereign risk on their books. Moody's will
continue to closely monitor the situation and the possible effects that this will have on the banks' creditworthiness amid an increasingly
fragile operating environment.