Moody’s Investors Service, the international rating agency, downgraded on November 7, 2019 the rating of three Lebanese banks, namely Bank Audi, BLOM Bank, and Byblos Bank, from “Caa1” to “Caa2” while maintaining their ratings under review for downgrade shortly after it revised the sovereign rating from “Caa1” to “Caa2” and maintained its rating under review for downgrade two days earlier. In parallel, Moody’s downgraded the banks’ foreign-currency deposit ratings from “Caa1” to “Caa3” (following the downgrade of the sovereign foreign currency deposits ceiling to Caa3), their baseline credit assessments (BCAs) and Adjusted BCAs from caa1 to caa2, their Counterparty Risk Ratings (CRR) from B3 to Caa1, their Counterparty Risk Assessments (CRAs) from B3(cr) to Caa1(cr), in addition to their national scale deposit ratings (NSRs) from Baa3.lb/LB-3 to B1.lb/LB-4. Moreover, the agency downgraded BLOM Bank’s long-term foreign currency certificate of deposits from Caa1 to Caa2. The downgrade showcases the banks’ high exposure to the sovereign on their balance sheets at a time of weakening government’s creditworthiness following the sovereign downgrade to Caa2, coupled with the constrained funding and liquidity positions in light of the political tensions in Lebanon, and a worsening operating environment for banks, leading Moody’s to lower the Macro Profile of Lebanon from “Very Weak +” to “Very Weak”.

According to Moody’s, the primary factor leading to said rating revision is the mentioned sovereign rating action and the strong and direct interconnection between sovereign credit risk and banks’ balance sheets. In this vein, the agency mentioned that banks’ overall exposure to government credit risk stood around 7 to 9 times Tier 1 capital and more than 50% of their assets according to the audited financial statements of 2018. The strong correlation to the sovereign makes the banks vulnerable to liquidity and interest rate risks, seeing the asset-liability mismatch between the long-term sovereign holdings and the short-term customer deposits. The banks are also operating in a harsh environment, notwithstanding their geographical diversification, which exposes them to a sovereign event risk, always according to the agency. Moreover, Moody’s believes that the funding and liquidity conditions have worsened as a result of the political and social tensions following the uprisings that lasted more than two weeks prompting Prime Minister Saad Hariri to resign and the banks to close for security purposes. The agency commented that the political and social uncertainties increase the downside risk of deposit outflows from Lebanon, coupled with limited deposit inflows and higher deposit rates. The situation is threatening Lebanon’s funding model, according to Moody’s, which mainly relies on capital inflows and deposit growth to be able to finance the government, maintain the foreign currency reserves’ level held at the Central Bank, preserve the currency peg and keep financial stability. It also mentioned that the current political situation might delay the government’s reform and policy adjustment efforts required to restore confidence and improve economic growth necessary to decrease the need for large deposit inflows and high interest rates on deposits. The agency also mentioned a contraction in private sector deposits during the first nine months of 2019 and a rising deposit dollarization rate, reaching 73% by end of September, reflecting a lower confidence in the currency peg. The agency views the reopening of branches after a near 2-week closure period as a favorable decision yet warns that in the event said actions took place once more with additional limitations on deposit withdrawals, Moody’s would consider it as a default event.

Moody’s decision to downgrade the long-term foreign currency deposit ratings to Caa3 for all three banks follows its decision to reduce the sovereign ceiling for currency deposits to Caa3. Said ceiling mirrors the risk of any likely future government intervention to limit depositors’ access to foreign currency deposits. The agency also lowered the Macro Profile of Lebanon from “Very Weak +” to “Very Weak” and mentioned that banks’ burdensome operating environment is the result of the political havoc in the country. The agency further commented that the current political situation will entail further delays in implementing reforms and this will result in additional negative economic repercussions.

Finally, Moody’s stated that it might confirm the rating of the three covered banks if the country achieves a better sovereign risk profile and witnesses renewed deposit inflows all the while recouping confidence. An additional downgrade in the banks’ ratings may be triggered by a massive deposit outflow that would put at stake the banking sector’s ability to satisfy both the government’s and the economy’s funding needs and would apply further pressure on the currency peg. On the other hand, any form of capital control measures may lead to another downgrade of the banks’ BCA, always according to Moody’s.