Fitch downgrades two major Lebanese banks on ‘difficult’ operating environment

Byblos Bank and Bank Audi, two of Lebanon’s biggest lenders, were downgraded by Fitch Ratings on Monday, with the ratings agency citing the difficult operating environment in the country and exposure to the Lebanese sovereign.

The ratings agency also cited both lenders’ substantial exposure to Banque du Liban (BDL) and the Central Bank of Lebanon.

Both banks’ long-term issuer default ratings were downgraded from B- to CCC, which means both lenders are currently vulnerable and dependent on favorable economic conditions to meet commitments.

Fitch said it views Byblos’ capitalization as weak, in light of its significant exposures to the Lebanese sovereign and BDL, and its profitability as weaker than peers.

“On the positive side, Fitch considers Byblos’s strong domestic franchise (as Lebanon’s third-largest bank with a market share of 8.5 percent of domestic banking sector assets) and competent management, as well as its so far resilient loan quality and deposit base despite some pricing pressures to retain deposits (especially in US dollars),” the ratings agency said.

Fitch noted that it believes the Lebanese authorities would be inclined to support Bank Audi and Byblos Bank if necessary, due to their “systemic” importance to the country’s banking sector and economy as whole.

“On the positive side, Fitch considers Audi’s leading domestic franchise (with a market share of about 10 percent 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 ).”

Although Lebanon remains Bank Audi’s main country of risk , the lender’s global operations have been budding and represent a large portion of its operations, namely Turkey (11 percent of credit risk exposures at end of the first half of 2019) and Egypt (8 percent), Fitch said.

An economy in shambles

In early September, Lebanese Prime Minister Saad Hariri said the country would declare an economic emergency as the government works to fast-track economic reforms.

He said accelerating reforms would avoid a crisis similar to Greece, which fell into a debt crisis nine years ago and had to adopt austerity measures under the strict supervision of foreign creditors.

“We don’t want this to happen to us. So we are taking measures to save the country,” Hariri had said.

A month after the announcement, Fitch downgraded Lebanon’s rating to CCC from B-, while Standard & Poor’s announced a 6-month grace period before changing its current rating of B-/B with a negative outlook.

Meanwhile, despite the downgrades and weakening operating environment in the country, the Institute of International Finance (IIF) said it still believes that Lebanon will not default, given its large international reserves, strong banking system, and track record of having never defaulted on foreign-currency debt.

But, a combination of higher interest rates, a bloated public sector, and political strife could lead to a narrowing in real gross domestic product (GDP), the IIF said.

The Lebanese government currently suffers from the heaviest arrears in the world, with public debt at 151 percent of GDP.

Real GDP growth in the country is currently at -0.6 percent, but is expected be 2.5 percent in 2020, the IIF added.

In April 2018, the country had won $11 billion in aid pledges at the CEDRE conference in Paris.

“Growth will resume in 2020, driven by the implementation of projects that are financed by CEDRE, We see the fiscal deficit narrowing in 2019 to 7.8 percent on a cash basis, and 9.5 percent on a commitment basis (which includes expenditure arrears equivalent to 1.7 percent of GDP),” said the IIF.

The country’s inflation rate is currently at 2.8 percent, but is expected to edge up to 3.0 percent in 2020, the IIF added.