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Moody's downgrades Banque Bemo to Aa3.lb; outlook negative (Lebanon)

Limassol, July 19, 2011 -- Moody's Investors Service has today downgraded to Aa3.lb from Aa2.lb Banque Bemo 's ( Bemo ) long-term national-scale rating (NSR). The outlook on the rating is negative. Bemo 's LB-1 short-term NSR was not affected by this action. This concludes Moody's review of Bemo 's ratings, initiated on 21 December 2010.

RATINGS RATIONALE

The rating action was driven by the slowdown in the Lebanese economy -- which has weakened domestic credit conditions -- and elevated regional political risk. These factors exacerbate Bemo 's intrinsic limitations arising from high single-party credit exposures, a modest franchise and marginal profitability.

Both domestic and regional political uncertainty have subdued business sentiment and economic growth in Lebanon during H1 2011. The sectors most affected include the tourist 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. As a result, Moody's forecasts that Lebanese economic growth will slow sharply to around 2.5% in 2011, from over 7.0% in the previous four years.

Bemo has a niche corporate and private-banking strategy and is mostly active in trade finance. Direct exposure to the most affected economic sectors is modest and it has only minimal exposure to the retail sector. However, given the bank's profile -- and within the context of weakened domestic conditions -- Bemo is vulnerable to deterioration in the credit standing of its large customers. Currently, the bank's asset quality is strong, although it also has very high single-party exposures, even before taking into account its exposures to the Lebanese sovereign. The sovereign risk exposure is significantly below the levels exhibited by larger rated Lebanese banks, but it remains a multiple of its Tier 1 capital.

In addition, the bank's corporate banking focus results in thinner profitability metrics, and profitability may not be able to absorb a plausible increase in provisioning charges. In Q1 2011, the bank reported an increase in profits mainly on the back of provisioning write-backs but problem loans are a lagging indicator and Q1 2011 write-banks reflected in part the very good performance of the Lebanese economy in prior years. In addition, the bank's profitability is materially impacted by the performance of its 22% Syrian associate Bank Bemo Saudi Fransi (BBSF). Bemo 's share of BBSF's profits accounted for 12% of net revenues and (due to Bemo 's elevated cost structure) over a third of the bank's net income.

The civil unrest in Syria is relatively localised and according to Bemo , the unrest has so far not had a significant impact on its affiliate operations in Syria. However, the political situation remains fluid and highly unpredictable. Conceivable losses from the bank's Syrian subsidiary could have a significant impact on Bemo 's performance. Additionally, Bemo has moderate direct credit exposure to Syria.

More positively, the LBP30 trillion core capital increase concluded in April 2011 improves the bank's capacity to tolerate asset-quality pressures, while similar to its other rated peers Bemo exhibits comfortable liquidity ratios, including significant deposits with international banks.

PRINCIPAL METHODOLOGIES

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.

Headquartered in Beirut, Lebanon, Banque Bemo reported total assets (un-audited) of USD1.95 billion as of March 2011.

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."

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

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

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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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