Fitch Ratings - Dubai : Fitch Ratings has downgraded Bank Audi's Long-Term Issuer Default Rating (IDR) to 'CCC' from 'B-' and Viability Rating (VR) to 'ccc' from 'b-'. A full list of rating actions is at the end of this commentary.
The downgrade follows Fitch's recent downgrade of the Lebanese sovereign to 'CCC' (see "Fitch Downgrades Lebanon to 'CCC'" dated 23 August 2019 at www.fitchratings.com ). Audi's ratings are constrained at the current level by the sovereign rating.
KEY RATING DRIVERS
IDRS and VR
Audi's Long-Term IDR is driven by the bank's intrinsic strength as expressed by its VR. The ratings are constrained at the current level by the sovereign 'CCC' rating. This is due to the difficult domestic operating environment (Lebanon represented about 68% of the bank's credit risk exposures at end-1H19) and the bank's substantial exposures to Banque du Liban (BDL; the central bank of Lebanon; 47% of total assets and 7.4X Fitch Core Capital at end-1H19) as well as to the Lebanese sovereign (9% and 1.4X, respectively). The BDL and sovereign exposures in part reflect the lack of domestic lending opportunities amid weak economic growth.
Fitch views the bank's capitalisation as weak in light of its substantial exposures to the Lebanese sovereign and BDL. On the positive side, Fitch considers Audi's leading domestic franchise (with a market share of about 10% of domestic banking sector assets), international diversification and competent management, as well as its so far resilient asset quality and deposit base despite some pricing pressures to retain deposits (especially in US dollars).
Audi's international operations have been growing and represent a significant portion of the bank's operations, in particular Turkey (11% of credit risk exposures at end-1H19) and Egypt (8%). However, Lebanon remains the bank's main country of risk.
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes the Lebanese authorities would have a high propensity to support Audi if needed, in view of its systemic importance to the banking sector and to the economy as a whole. However, the Support Rating Floor (SRF) of 'No Floor' reflects Fitch's view that the sovereign's ability to support the banking sector and Audi cannot be relied on given the low sovereign rating.
RATING SENSITIVITIES
IDRS AND VR
At this rating level, a further downgrade of the sovereign rating could but would not necessarily lead to a downgrade of Audi's ratings. An extended weakening of the operating environment leading to material deterioration in depositor confidence, a significant deterioration in asset quality eroding the banks' capital base, or capital controls imposed by the Lebanese authorities could also lead to a downgrade.
An upgrade of the Lebanese sovereign or a very significant reduction in Lebanese sovereign and BDL exposure relative to capital could lead to an upgrade. Fitch believes the latter is unlikely in the short to medium term given the important role Audi plays in financing the sovereign.
SUPPORT RATING AND SRF
An upgrade of the Support Rating and an upward revision of SRF would be contingent on a positive change in the sovereign's ability to support domestic banks, most likely through a multi-notch sovereign upgrade. Fitch does not currently expect this.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg
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Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@fitchratings.com
Additional information is available on www.fitchratings.com
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