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Fitch Ratings-Dubai-December 12:
Fitch Ratings has downgraded Lebanon-based Bank Audi SAL's (Audi) and Byblos Bank SAL's (Byblos) Long- and Short-Term Issuer Default Ratings (IDRs) to 'RD' (Restricted Default) from 'CCC-' and 'C' respectively. Fitch has also downgraded the banks' Viability Ratings (VR) to 'f' from 'ccc-' and removed them from Rating Watch Negative (RWN). A full list of the rating actions is detailed below.
The rating action follows recently adopted measures by the Banque du Liban (BdL; Lebanese central bank), which introduced certain restrictions for banks' operations in foreign currency (FC), including for payments on customer deposits. These measures indicate increasing funding and currency stress in the country and are undertaken by BDL to limit pressures on the country's currency reserves and banking sector.
Key Rating Drivers
IDRs
The downgrade of both banks' IDRs reflect the regulatory intervention into banking-sector deposits, which impedes the banks' ability to service their contractual obligations in FC in full compliance with their original terms. The new regulatory measures, which require banks to pay in local currency (LC) half of the interest due on their FC customer deposits, in our view, represent a material reduction in terms compared with the original contractual terms of banks' financial obligations and meet Fitch's definition of a restricted default. These measures are announced to be in place for six months; however, we expect them to be renewed given the pressure on BdL's FC reserves and the lack of FC inflows from non-resident depositors.
To limit the ongoing deposit withdrawals, the Lebanese banks association set US dollar cash withdrawal limit of USD1,000/week with some banks applying tighter limits due to increasing FC-liquidity pressures.
VRs
The downgrades of the banks' VRs to 'f' reflect Fitch's view that banks have failed and would have defaulted had capital controls not been imposed given the high appetite for deposit withdrawals and lack of confidence in the banking system.
Banks' access to FC in the market is highly stretched and the banks' FC-liquidity management remains largely dependent on the ability of BdL to meet its FC obligations to commercial banks, which is becoming significantly constrained with the ongoing decline in its own FC reserves. Fitch expects FC reserves to decline to USD28 billion at end-2019 (down USD4 billion in 2019), and will continue to be eroded in 2020, given large external financing needs and current account deficit. We see an increasing risk that access to banks' assets with BdL, which represent more than 60% of sector banks' FC assets could become restricted at times of stress.
Exposures to BdL (placements and certificates of deposit (CDs)) represented a substantial 47% and 52% of Audi's and Byblos's balance sheets respectively at end-1H19 (7.4x and 9.1x of Audi's and Byblos's Fitch Core Capital respectively). As per the recent regulatory amendments, half of the interest paid by BdL on US dollar CDs and banks' US dollars placements at BdL will be in LC, which further restrains banks' FC liquidity and debt service capacity.
SUPPORT RATING AND SUPPORT RATING FLOOR
The affirmation of the banks' '5' Support Ratings and the Support Rating Floors (SRF) of 'No Floor' reflects Fitch's view of the significantly constrained sovereign's ability to support banks, in particular in FC, as indicated by the low sovereign rating of 'CCC'.
RATING SENSITIVITIES
IDRs and VRs
The ratings are unlikely to be upgraded until Fitch believes the banks are no longer defaulting, capital controls are materially eased and confidence is restored in the banking system, as evidenced by a return of strong FC inflows from non-resident depositors and investors, easing pressure on the banks' FC liquidity. In case of any upgrade we expect the ratings to be closely linked to those of Lebanon's sovereign 'CCC' rating, given the banks' large exposure to BdL and the Lebanese sovereign, and also capturing other weaknesses in the credit profiles and performance challenges that domestic banks are facing.
SUPPORT RATINGS AND SRFS
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. However, 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. This means ESG issues are credit-neutral or have only a minimal credit impact on the entities, either due to their nature or to the way in which they are being managed by the entities. For more information on our ESG Relevance Scores, visit
Bank Audi S.A.L.; Long Term Issuer Default Rating; Downgrade; RD; RW: Off
; Short Term Issuer Default Rating; Downgrade; RD; RW: Off
; Viability Rating; Downgrade; f; RW: Off
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
Byblos Bank S.A.L.; Long Term Issuer Default Rating; Downgrade; RD; RW: Off
; Short Term Issuer Default Rating; Downgrade; RD; RW: Off
; Viability Rating; Downgrade; f; RW: Off
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
Contacts:
Primary Rating Analyst
Zeinab Abdalla,
Director
+971 4 424 1210
Fitch Ratings Ltd
Al Thuraya Tower 1, Office 1805 & 1806, Dubai Media City, PO Box 502030
Dubai
Secondary Rating Analyst
Gilbert Hobeika,
Associate Director
+971 4 424 1214
Committee Chairperson
Olga Ignatieva,
Senior Director
+7 495 956 6906
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com.
Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 12 Oct 2018)
Short-Term Ratings Criteria (pub. 02 May 2019)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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