Fitch Downgrades Banque Audi And Byblos Bank

VOL. XLV

No 27

8-July-2002

LEBANON

Fitch Downgrades Banque Audi And Byblos Bank

Ratings agency Fitch announced on 28 June that is had downgraded Banque Audi and Byblos Bank’s individual ratings from C to C/D. At the same time, Fitch reaffirmed the two banks’ long-term, short-term and support ratings at B-, B and 4T respectively. The outlook for both banks is stable. The move “reflects the two banks’ mediocre asset quality and profitability resulting from the weak domestic operating environment,” said Fitch.

The weakness of the Lebanese economy, which grew only around 1% in 2001 and is forecast to grow at the same rate in 2002, combined with the country’s mounting debt burden (168% of GDP at end-2001), are factors that have impacted both banks’ financials and increased their risk profile. Fitch notes that the weak economy, high real interest rates and successive high fiscal deficits have left the country’s debt burden unsustainable in the medium term. The privatization of public assets such as telecommunications, water utilities, electricity, the national airline and the tobacco monopoly, which could reduce the burden on government and contribute to reducing government debt, is making slow progress. Moreover, the economy has been negatively impacted by high regional security tensions which have reduced confidence in the country.

Fitch acknowledges “both banks’ strong management and sensible strategy,” but says that these factors are more than offset by the weak Lebanese economy. Furthermore, doubtful loans account for 12% of Audi’s gross loans and 13% of Byblos Bank’s, and at the end of 2001 Banque Audi’s loans were only 66% covered by reserves, with a corresponding figure of 77% for Byblos Bank. Both banks have reduced their exposure to Lebanese government bills, but they still made up 31% of Audi’s and 42% of Byblos Bank’s assets at the end of 2001. This, says Fitch, not only exposes them to government debt service problems, but also creates “a substantial interest rate mismatch, given the short-term nature of their deposit base.” The two banks, like all Lebanese banks, are exposed to the increasing risk of devaluation of the Lebanese pound, according to Fitch. The agency believes that the banks’ profitability, although acceptable by international standards, remains too low on a risk reward basis. Both also have satisfactory capital adequacy ratios, but only because government securities are 0% weighted.