Standard & Poor’s Global Ratings (S&P), the international rating agency, downgraded the long-term issuer credit rating of three Lebanese banks, namely Bank Audi, BLOM Bank, and BankMed, from “B-” to “CCC” while keeping them on CreditWatch Negative. The agency also lowered the short-term issuer credit rating for Bank Audi and BankMed from “B” to “C”. According to S&P, the downgrade of the three banks can be attributed to weaker customer confidence in the liquidity position of banks after closing for some time due to the social uprising and protests. The CreditWatch Negative implies that an additional downgrade could occur in the event further pressure is placed on the banks’ liquidity or if restrictions are placed on certain transfers and operations, according to the agency.

According to S&P, banks are experiencing increasing liquidity pressure as a result of recent political tensions, social unrest, prolonged periods of shutdown and restrictions imposed on some transfers and operations. In addition, the agency believes that the sizeable asset liability mismatch on all three banks’ balance sheets constrains their ability to meet large deposit outflows at times of liquidity crunches. In this regard, the agency pointed out that the short-term customer deposits at banks are being invested in longer-term placements at the Central Bank in the form of term deposits and certificate of deposits having medium and long-term maturities. It stated that banks’ placements with the BDL account for 57% of the sector’s total balance sheet by end of July 2019. Furthermore, the agency pointed out that BDL expressed its readiness to provide lending facilities to banks facing liquidity pressures in the form of short-term USD facilities bearing a 20% annual interest rate. S&P expects the Central Bank to keep on supporting banks’ liquidity in times of need, yet highlights that financing the Lebanese government limits its capacity to do so. The agency also mentioned other, less plausible risks Lebanese banks face, such as “material risks to their capital bases and earnings”. In details, the agency views banks’ capitalization as susceptible to “weak creditworthiness of large sovereign exposures”, and that future prospects have deteriorated due to the rising cost of deposits and banks’ attempt to increase deposit maturities, coupled with possible “one-off” tax payment to the government.

In this vein, the agency commented that it will clear the aforementioned CreditWatch within the upcoming three months as it get a more clear picture on deposit outflows and on the restrictions imposed by banks on transfers and operations. Furthermore, S&P revealed that it may opt to reduce the ratings of the concerned banks if deposit outflows surpass the banks’ liquidity buffers and BDL support, leading to a higher probability these banks might fail at meeting their obligations towards customers on time. The agency could also downgrade banks’ ratings if severe capital control measures are imposed. In contrast, the agency stated that it could affirm all three banks’ ratings if liquidity tensions start dissipating and banks’ abilities at meeting their obligations towards customers improve. This is achievable if customer confidence rises significantly due to positive political developments or external support coming to the country.