Moody’s Investors Service, the international rating agency, downgraded on February 25, 2020 the long-term local currency deposit rating of three Lebanese banks, namely Bank Audi, BLOM Bank, and Byblos Bank, from “Caa2” to “Caa3”, and changed their outlook from “under review for downgrade” to “negative”. This rating action comes in the wake of the sovereign rating downgrade from “Caa2” to “Ca” four days earlier. In parallel, Moody’s downgraded the banks’ long-term foreign-currency deposit ratings from “Caa3” to “Ca” and changed their outlook to “stable”, their long-term local currency Counterparty Risk Ratings (CRRs) from “Caa1” to “Caa3”, their long-term foreign currency CRR from “Caa1” to “Ca”, their Counterparty Risk Assessments (CRAs) from “Caa1(cr)” to “Caa3(cr)”, their national scale ratings (NSRs) for deposits from “B1.lb” to “Caa1.lb”, their national scale CRRs from “Baa3.lb/LB-3” to “Caa1.lb/LB-4”, in addition to BLOM bank’s long-term foreign currency deposit certificates from “Caa2” to “Ca”. From another standpoint, the agency affirmed the banks’ baseline credit assessments (BCAs) and Adjusted BCAs at “caa2”. The downgrade showcases the banks’ high exposure to the sovereign amid worsening financial and economic conditions in Lebanon which highly increase the probability of sovereign debt restructuring, entailing as such further losses to banks. The change in the outlook of the local currency deposit rating is the result of the high uncertainty surrounding the effectiveness of reform implementation in Lebanon, the availability of an external support package to assist with these reforms, and the risk of the de-pegging of the currency. The stable outlook of the foreign-currency deposit rating reflects the stable outlook on Lebanon’s Ca sovereign rating.

According to Moody’s, the aforementioned high probability of a debt restructuring scenario is placing additional solvency and liquidity pressures on Lebanese banks. In details, the agency considers a possible debt restructuring exercise as the most likely scenario, one that would induce large potential losses for private creditors and in turn, may have negative repercussions on banks. The agency commented that Lebanese banks hold large amounts of government’s debt and placements with the Central Bank, with the banks’ overall exposure to government credit risk standing around 7 to 9 times Tier 1 capital according to their audited financial statements of 2018. Moreover, the dire financial and economic conditions came on the back of the sizeable capital outflows following the social upheavals that started in October 2019, the economic contraction resulting from the restrictions imposed on bank depositors’ transfers abroad and cash withdrawals (specifically in USD), and the widening parallel exchange rate compared to the official rate that is jeopardizing the peg’s sustainability. In figures, Moody’s stated that private sector deposits at Lebanese banks fell by $15.7 billion in 2019, $11.4 billion of which were in the last quarter alone despite the informal capital control measures taken by banks. In parallel, the agency highlighted that the Central Banks’ foreign assets fell to $30.5 billion as at mid-February 2020, from $34.8 billion by end of 2018. Moody’s expects real GDP to drop by 4.5% in 2019, and the banks’ loan quality to deteriorate due to the economic contraction, higher inflation, higher unemployment levels and salary cuts. Accordingly, banks may need to constitute additional provisions, thereby affecting their profitability, always according to Moody’s. From another standpoint, Moody’s commented that following the interest rate caps placed by the Central Bank on new and renewed LBP and USD deposits, banks resorted to cutting their lending rates in an attempt to curb any increase in delinquent loans. In a related context, Moody’s stated that Lebanese banks’ loans to the private sector fell by $9.4 billion in 2019 to $49.5 billion. In addition, the report pointed out that banks are in the process of increasing their capital by 20% of their 2018 Common Tier 1 capital as per the Central Banks’ guidelines, assisting them in improving their solvency and liquidity levels. From another standpoint, the agency lowered the Macro Profile of Lebanon from “Very Weak” to “Very Weak -” reflecting as such banks’ weak operating environment. The rating agency indicated that it does not differentiate between the ratings of the banks at present, citing the nature of the challenges that banks are encountering, in addition to their large exposure to the sovereign.

Finally, Moody’s stated that it might change the outlook of the three covered banks to stable if solvency and liquidity pressures on banks are reduced, and if capital control measures are eased and confidence is restored. On the other hand, the agency commented that it could further downgrade banks’ ratings if the probability of a sovereign default increases and/or the currency peg is no longer maintained.