Fitch Ratings, the international rating agency, downgraded on October 29, 2019 the long-term Issuer Default Rating (IDR) of two Lebanese banks, namely Bank Audi and Byblos Bank, from “CCC” to “CCC-”, while placing both banks on Rating Watch Negative (RWN). Concurrently, the agency lowered the banks’ viability rating (VR) from “ccc” to “ccc-”, yet kept their short-term IDR, support rating and support rating floor unchanged at “C”, “5” and “No Floor”. In detail, the agency mentions that the downgrades showcase “heightened liquidity risks” the 2 concerned banks and the sector in general are facing amid the increasing political bickering and social upheaval which prompted banks to close since October 18 as a result of protests and demonstrations. In addition, Fitch considers that deposits in the banking sector are under pressure amid weaker confidence. The agency also stated that the RWN implies the likelihood of further rating downgrade if liquidity in foreign currency undergoes additional pressure, noting that in the case of Bank Audi, its deposit dollarization rate stood at 88% in the first half of 2019, while that of Byblos Bank leveled at 69%. Fitch further mentioned the asset liability mismatch of both banks, citing their weak foreign currency liquidity namely in the form of long-term placements and certificates of deposits at the Central Bank, which make their customer deposits “vulnerable to unexpected deposit outflows” since deposits are mostly short-term in nature. The agency stated that both banks and the banking sector in general may have difficulties in having access to foreign currency liquidity depending on the Central Banks’ ability to meet banks’ foreign currency obligations at times of economic distress. Fitch also considered both banks’ asset quality and core capitalization ratios as “weak” as a result of their high exposure to the Central Bank (47% of total assets and 7.4x Fitch Core Capital in the first half of 2019 for Bank Audi and 52% of total assets and 9.1x Fitch Core Capital for Byblos Bank) and to the Lebanese government (9% of total assets and 1.4x Fitch Core Capital in the first half of 2019 for Bank Audi and 12% of total assets and 2.1x Fitch Core Capital for Byblos Bank). Furthermore, the rating agency stated that both banks may face additional pressure on their profitability on the back of the increasing cost of funds and loan impairment, notwithstanding their resilient loan quality (stages 2 and 3 loans as a percentage of gross loans stood at 16% and 7% respectively in the first half of 2019 for Bank Audi, while standing at 6.7% and 5.3% for Byblos Bank).

Fitch commented that the IDRs and the VRs might see additional downgrades in the event the banks experience funding stress that might affect their liquidity levels, the Lebanese authorities intervene in the banking sector deposits limiting their deposits ability to service their obligations and if the concerned banks remain closed for a period of one month. Fitch reported that any additional downgrade of the sovereign will bring upon an additional downgrade to both Bank Audi and Byblos Bank given their high direct exposure to the sovereign. On the other hand, the agency mentioned that an upgrade of both banks’ Support Ratings and upward revision of their Support Rating Floors is contingent upon an improvement in the government’s ability to support the banking sector through a “multi-notch” sovereign upgrade, which it believes is highly unlikely to happen.