Fitch affirms Bank Audi and Byblos Bank at 'B-'; Outlook Stable

The Support Rating Floors for both banks are affirmed at 'CCC'. At the same time BLOM Bank's (BLOM), another Lebanese bank, Support rating is affirmed at '5'. Fitch does not maintain any other ratings, apart from Support, on BLOM.

The ratings reflect, and are constrained by, the ongoing weaknesses of the Lebanese operating environment and the banks' substantial, albeit declining, exposure to the sovereign. The Individual ratings reflect the risk of a continuation, or even an escalation, of the current political tensions around the nomination of a new president and consequent effects on depositor confidence and asset quality. They also reflect the banks' strong franchises, competent management, and resilient profitability in spite of ongoing economic and political instability.

Fitch still believes the balance of risk is reflected in the 'B-' (B minus) rating; the direction of the rating will be determined by political developments, their implications for economic reform implementation, and confidence in the banking system.

The banks' Support ratings reflect Fitch's view that the Lebanese authorities would almost certainly try to support the banks if needed; however, a low sovereign rating ('B-' (B minus)) means the ability to provide such support cannot be relied upon.

Bank Audi, Byblos and BLOM have reported sound results for the full year 2007, recording continued profit growth in spite of difficult operating conditions. The three banks aim to circumvent the constraints of a small and challenging domestic market through selective regional expansion; and while diversification is to be viewed positively, some of the expansion is to countries that also have uncertain political and economic outlooks.

Bank Audi was the largest Lebanese bank by assets at end-2007, accounting for just over a fifth of the system total. Commercial lending is the bank's core business although it is broadening its range of retail and investment banking activities; it also offers private banking services. Like other large Lebanese banks, regional expansion is a priority and the bank is expanding in Jordan, Egypt, Syria, Sudan, Qatar and Saudi Arabia.

The bank is also present in France and Switzerland (where it has a private banking subsidiary). At end-2007 over a quarter of assets and about 20% of profits were generated outside Lebanon. The bank intends to have its foreign operations contribute half of both assets and profits by 2011, a diversification which Fitch on the whole views as a positive move. Bank Audi's shares are listed on the London and Beirut stock exchanges.

Byblos is the third-largest bank in Lebanon by assets, accounting for about 12% of system assets, and has the third-largest market share of loans and deposits. Its core business is commercial banking, although it is active in retail and investment banking. Byblos is expanding internationally; the bank operates in Abu Dhabi, Belgium, Cyprus, France, Syria, Sudan and the UK. It is planning operations in Algeria and Iraq. Currently about 21% of assets and 17% of net income are generated from outside Lebanon, the bank is aiming to raise this to 40% each within the next five years.

Blom is the second-largest bank in Lebanon by assets, accounting for about 20% of system assets at end-2007. Mainly active in corporate banking, BLOM is a leading player in consumer lending and is developing private banking activities. The bank operates in Cyprus, Egypt, Syria, Jordan, France, Switzerland, UAE and the UK; it is also establishing an investment subsidiary in Saudi Arabia and has obtained a license to establish a commercial bank in Qatar. The Bank of New York is BLOM's main shareholder with a 34.4% stake, as the depositary for BLOM's GDRs.