Complex Made Simple

Fitch revises Lebanon’s Bank Audi and Byblos Bank’s outlooks to negative

Fitch Ratings has revised the Outlooks on Bank Audi (Audi) and Byblos Bank’s (Byblos) Long-term Issuer Default Ratings (IDR) to Negative from Stable. The agency has affirmed the banks’ Long-term IDRs and Viability Ratings at ‘B’. A full list of rating actions is at the end of this rating action commentary.

The Outlook revision reflects the revision of Lebanon’s rating Outlook to Negative on the 19 December 2013 (see ‘Fitch Revises Lebanon’s Outlook to Negative; Affirms IDR at ‘B’ dated 19 December 2013 at www.fitchratings.com).

The Negative Outlook on Lebanon reflects heightened political risk with the involvement of Hezbollah and Sunni groups in the neighbouring Syrian conflict increasing sectarian tensions domestically. Violence in Lebanon, though still sporadic, has intensified in recent months. The ever-rising number of refugees also adds to tensions and strains, especially on infrastructure and public institutions. In the absence of agreement on the composition of a new government, political life has been paralysed since March 2013, and presidential elections in 2014 add to political uncertainty. It also reflects the country’s weak growth prospects, with loss of confidence induced by spill-overs from the Syrian conflict taking a heavy toll on economic performance.

KEY RATING DRIVERS – IDRs and VR

Both Audi’s and Byblos’ Long-Term IDRs are driven by their intrinsic strength expressed by their VRs. The IDRs and VRs reflect the strong correlation between sovereign and bank risks due to the banks’ substantial exposure to the Lebanese sovereign through their large holding of government debt, as well as the impact of the difficult local and regional operating environment. The ratings for both banks also take into account a strong domestic franchise (specifically their deposit franchise), competent management, and relatively sound loan quality, despite the regional unrest. Deposit growth, fuelled by the large Lebanese diaspora, has so far remained resilient: the overall deposit base rose 7.8% yoy in October 2013.

RATING SENSITIVITIES – IDRs and VR

Both banks’ ratings are closely correlated with Lebanon’s ratings, and are sensitive to economic and political developments, both within Lebanon and in the wider region. A prolonged weakening of the operating environment, especially if it materially affected depositor confidence, any significant deterioration in asset quality or substantially reduced profitability could result in downward rating pressure.

KEY RATING DRIVERS – 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 and to the economy as a whole. However, given the low sovereign rating (‘B’/Negative), the sovereign’s ability to provide support, although possible, cannot be relied on. The Support Rating Floor of ‘CCC’ indicates the potential difficulty the authorities might have if system-wide support for the banking sector, including Audi and Byblos, were required.

RATING SENSITIVITIES – SUPPORT RATING AND SUPPORT RATING FLOOR

The ratings are 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 Revised to 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 Revised to Negative

Short-term IDR affirmed at ‘B’

Viability Rating affirmed at ‘b’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘CCC’