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Fitch affirms Lebanon’s Bank Audi & Byblos Bank at ‘B’

Negative Outlook

Fitch Ratings has affirmed Bank Audi’s (Audi) and Byblos Bank’s (Byblos) Long-term Issuer Default Ratings (IDR) at ‘B’ with Negative Outlooks.

The Viability Ratings (VR) have been affirmed at ‘b’. A full list of rating actions is at the end of this commentary.

The Negative Outlook on the Long-term IDRs is driven by Lebanon’s sovereign rating (B/Negative), which Fitch affirmed on 11 December 2015 (see ‘Fitch Affirms Lebanon at ‘B’; Outlook Negative’). The key driver of the sovereign’s Negative Outlook is the country’s continued high political risk. Recent bomb attacks highlights ongoing vulnerability to the spillover from the war in Syria, and the political deadlock shows no signs of easing. Fitch expects minimal real GDP growth of 1.2% is 2015 and no major improvement in growth prospects before the end of the Syrian conflict.

KEY RATING DRIVERS

IDRs and VRs

Audi’s and Byblos’s Long-term IDRs are driven by their intrinsic strength as expressed by their VRs. The ratings are capped by the sovereign rating due to the strong correlation between sovereign and bank risks, with both banks having substantial exposure to the Lebanese sovereign and central bank. Both the operating environment and the banks’ asset quality have a high influence on their VRs.

Audi’s VR also reflects its leading domestic franchise, increasing international diversification, adequate liquidity profile, resilient deposit base and competent management. It further considers its weak capitalisation in light of its large holdings of Lebanese sovereign debt. Audi’s international operations are a growing and significant part of the bank, in particular in Turkey, but Lebanon still represents over half of group assets.

Byblos’ VR also reflects its strong domestic franchise, solid liquidity, resilient deposit base and competent management. It further considers the bank’s weak capitalisation in light of its large holdings of Lebanese sovereign debt, higher cost of funds and somewhat lower profitability than peers.

SUPPORT RATING AND SUPPORT RATING FLOOR

Fitch considers that the Lebanese authorities would have a high propensity to support both Audi and Byblos if necessary, in view of their systemic importance to the banking sector (both banks represent around 10% of domestic banking assets) and to the economy as a whole. However, given the low sovereign rating, the sovereign’s ability to provide support, although possible, cannot be relied on. The Support Rating Floors of ‘CCC’ indicates the potential difficulty the authorities might have if system-wide support for the banking sector, including Audi and Byblos, was required.

RATING SENSITIVITIES

IDRS and VRs

Both banks’ ratings will be downgraded if the sovereign rating is downgraded. A prolonged weakening of the operating environment leading to a material decrease in depositor confidence, or a significant deterioration in asset quality reducing the banks’ capital base could also lead to a downgrade.

While Audi’s expansion in Turkey is positive for diversification and appears to have been managed well so far, Fitch will closely monitor the development of the loan book given the bank’s relatively short track record in this market and fast loan growth in recent years.

A very significant reduction in Lebanese sovereign debt exposure relative to capital could lead to an upgrade of both banks’ ratings. This is viewed as unlikely in the short to medium term, given the vital role the banks play in financing the sovereign. Fitch expects Audi’s continued international expansion to reduce its dependence on Lebanon over time, but Lebanese sovereign and central bank exposures will likely still represent a multiple of the bank’s capital base for the foreseeable future.

SUPPORT RATING AND SUPPORT RATING FLOOR

The ratings are primarily sensitive to any change in the sovereign’s ratings, as they are closely correlated to the sovereign’s ability to provide support.

The rating actions are as follows:

Bank Audi:

Long-term IDR affirmed at ‘B’; Outlook Negative

Short-term IDR affirmed at ‘B’

Viability Rating affirmed at ‘b’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘CCC’

Byblos Bank:

Long-term IDR affirmed at ‘B’; Outlook Negative

Short-term IDR affirmed at ‘B’

Viability Rating affirmed at ‘b’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘CCC’