Moody’s has downgraded Lebanon’s three largest banks by assets further into junk territory, reflecting the weakening creditworthiness of the Lebanese government as civil unrest cripples the country.
The rating agency downgraded the local-currency deposit ratings of Bank Audi, BLOM Bank and Byblos Bank to Caa2 from Caa1. The three banks' foreign-currency deposit ratings were also downgraded to Caa3 from Caa1, citing constrained sovereign support for such deposits.
“The downgrade on the banks’ ratings reflects the weakening creditworthiness of the Lebanese government, reflected in the downgrade of the government’s issuer rating to Caa2, owing to the high level of sovereign exposure held on the banks’ balance sheets,” says Moody’s.
Additionally, the downgrade also reflects strained systemic funding and liquidity conditions in view of the increased political uncertainty facing the country and a deterioration in the operating environment for banks, which led to the lowering of the country’s macro profile to ‘very weak' from ‘very weak +’.
The Lebanese government's weakening creditworthiness is adversely affecting the three banks’ own creditworthiness given their large exposure to the Lebanese sovereign, which is their main source of risk.
Moody’s said that the three lenders’ overall sovereign exposure (including government securities and placements at Banque du Liban) was equivalent to around seven to nine times their Tier 1 capital, more than half of the banks' assets based on their audited year-end 2018 financial statements.
Last month, Fitch Ratings downgraded Lebanon’s Bank Audi and Byblos Bank due to the impact of rising political tensions following nearly two weeks of nationwide protests, triggered in part by a currency crisis and struggling economy.
Thousands of protesters have been on the streets for weeks in Lebanon, demanding the resignation of a political class that they say has left the country on the verge of bankruptcy, leaving little for public services.
In an effort to boost liquidity and stave off possible downgrades, Lebanon’s central bank instructed local lenders to raise their capital by 20 per cent by next June.
Fitch said that the state’s ability to support banks cannot be relied on given the low sovereign rating and a further downgrade to Lebanon’s credit rating could lead to similar moves on the banks.
Last week, the World Bank reiterated that it stood ready to support a new Lebanese government, warning the country had no time to waste to tackle an emerging economic crisis worsening by the day.
Saroj Kumar Jha, World Bank’s Regional Director, said, “Politics captures the most attention, but the economy has the most risks—with every passing day, the situation is becoming more acute and this makes recovery extremely challenging.”
The World Bank is among foreign donors who pledged billions of dollars in badly needed aid last year, as long as Lebanon’s government enacts reforms it has long delayed. But with foreign allies not fully convinced, the money has yet to flow into the economy.