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Moody's changes outlooks on four Lebanese banks to negative

Limassol, July 19, 2011 -- Moody's Investors Service has today changed to negative from stable the outlooks on the standalone bank financial strength ratings (BFSR) and global local-currency (GLC) deposit ratings of four Lebanese banks Bank Audi ; (ii) Blom Bank ; (iii) Bank of Beirut ; and (iv) Byblos Bank . All four banks have D- BFSRs -- 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 outlooks on the banks' long-term national-scale ratings (NSRs) to negative from stable ( Bank Audi Aa1.lb, Blom Bank Aa1.lb, Byblos Bank Aa2.lb, Bank of Beirut Aa2.lb).

The banks' long-term foreign-currency deposit ratings were not affected by today's announcements, as they remain capped by Lebanon's B1 ceiling for those deposits.

The rating announcements 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 negative outlook on the system's 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.

RATINGS RATIONALE

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 2011 -- has removed one source of political uncertainty.

The sectors most affected include the tourism industry (which directly and indirectly employs around 25% of the local work force) 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 almost certainly further weaken business sentiment in Lebanon and could disrupt trade flows between the two countries. Increased uncertainties, both domestic and regional, affect Lebanese banks' operating environment and heighten the risks to their asset quality and performance.

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. Rated banks report that their performance in the region remains good, but we note that there typically is a time lag between credit negative events and evidence of asset-quality deterioration.

Concurrently, very high exposure to sovereign risk continues to exert considerable pressure on the four rated banks' standalone credit strengths. Their portfolios of low-rated Lebanese government securities are several times their respective Tier 1 capital levels. This represents a systemic issue, whereby the banking sector effectively funds high Lebanese public debt.

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). That said, Lebanon's banking system (and government finances) remain susceptible to events that might cause a loss of depositor confidence.

NATIONAL SCALE RATINGS

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Implementation Guidance published in August 2010 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

PREVIOUS RATING ACTIONS & METHODOLGIES USED

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The principal methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

At year-end 2010, Bank Audi reported total assets of LBP43.2 trillion (USD28.7 billion), Blom bank reported LBP33.7 trillion (USD22.4 billion), Byblos Bank reported LBP23.0 trillion (USD15.3 billion) while Bank of Beirut reported total assets of LBP12.0 trillion (USD8.0 billion). All four banks are headquartered in Beirut.

Limassol
Stathis A. Kyriakides, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Cyprus Ltd.
Kanika Business Centre
319 28th October Avenue
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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