Fitch Ratings has downgraded Audi Bank SAL's (AUD) Long-Term Issuer Default Rating (IDR) to 'CCC-' from 'CCC' and Viability Rating (VR) to 'ccc-' from 'ccc'. Fitch has also placed AUD on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary.
The downgrade and the RWN reflect heightened liquidity risks AUD and other Lebanese banks are facing in view of increasing political tensions and social unrest in Lebanon. These events have caused a closure of domestic banks for operations since 18 October 2019. In our view deposit stability is now at greater risk as depositor confidence has also suffered.
The RWN reflects the probability of a further downgrade if potential funding stress materially affects the bank's liquidity profile. We expect to resolve the RWN in the near term depending on the evolution of the bank's funding and liquidity position in the current stressful operating environment.
KEY RATING DRIVERS
IDRS AND VR
The downgrade and RWN on AUD's Long-Term IDR reflects a similar action on the VR. The RWN reflects our view of the heightened liquidity risks for AUD (similar to other Lebanese banks), in particular in foreign currency (FC) (88% of AUD's deposits were in foreign currency at end-1H19).
We view the bank's FC-liquidity position as weak as, similar to other Lebanese banks, AUD's FC-liquidity is mainly in long-term placements and certificates of deposits (CDs) at the central bank, while customer deposits are largely of short-term nature. This makes AUD's liquidity position particularly vulnerable to unexpected deposits outflows. Access to FC in the market is stretched and the bank's FC-liquidity management is largely dependent on the central bank's ability to meet FC obligations, while we see a risk that access to AUD's assets with the central bank could become restricted at times of stress.
Fitch also views the bank's asset quality and capitalisation as weak in light of its substantial exposures to the central bank (end-1H19: 47% of total assets and 7.4x Fitch Core Capital) and the Lebanese sovereign (rated CCC; 9% and 1.4x, respectively). AUD's profitability could come under further pressure from higher cost of funding, as well as higher impairment charges despite the bank's current resilient loan quality (end-1H19: IFRS 9 Stage 3 loans at 7% of gross loans; Stage 2: 16%).
SUPPORT RATING AND SUPPORT RATING FLOOR
Fitch believes the Lebanese authorities would have a high propensity to support AUD 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 AUD cannot be relied on given the low sovereign rating.
RATING SENSITIVITIES
IDRs AND VR
AUD's IDRs and VR could be downgraded in case (i) a funding stress materialises or becomes more likely that could materially affect the bank's liquidity profile; (ii) of some form of material intervention in the banking sector deposits by the Lebanese authorities that could constrain banks' ability to service their obligations; (iii) Lebanese banks, including AUD, remaining closed for an extended period of around a month.
Given the bank's very high direct exposure to Lebanon, a further downgrade of the sovereign rating could also lead to a downgrade of AUD's ratings.
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. 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 entity, either due to their nature or to 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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