Fitch Affirms Bank Audi Ratings At ‘B’; Outlook Stable

Fitch Ratings has affirmed Bank Audi S.A.L’s (Audi)Long-term Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook and its Viability Rating (VR) at ‘b’. A full list of rating actions is at the end of this release.

Audi’s Long-term IDR is driven by its intrinsic strength, expressed by its VR. Audi’s Long-term IDR and VR reflect the strong correlation between sovereign and bank risks due to its substantial exposure to the Lebanese sovereign, through its large holding of government debt, as well as the difficult local and regional operating environment. The ratings also take into account Audi’s strong franchise, competent management, sound asset quality despite the regional unrest, resilient profitability, and stable and large deposit base.

The ratings are closely related to and constrained by, Lebanon’s ratings, and are sensitive to economic and political developments, both within Lebanon and in the wider region. A prolonged weakening of the operating environment, significant deterioration in asset quality or substantially reduced        profitability could result in downward rating pressure.

Audi’s core earnings continue to be strong, with pre-impairment operating profit rising by 18% in 2011 and by 20% yoy in Q112. Net income was however constrained by a sharp rise in impairment charges, which almost tripled to LBP148bn in 2011(LBP47bn in Q112, double the level at end-Q111). However a large part of the increase in provisions was precautionary: a result of Audi’s decision to boost reserve coverage in Egypt and Syria given the uncertainties – to differing degrees – in both markets. Impairment charges still absorbed only a reasonable 17% of pre-impairment operating profit in 2011 and 20% in Q112.

Audi has a strong deposit franchise and non-equity funding consists almost entirely of customer deposits. About three quarters of deposits are retail and concentrations are small. Audi has substantial liquidity in both USD and LBP. Liquid assets consist of a substantial portfolio of government securities, placements with the Lebanese central bank, and interbank placements.

Capital is only adequate, considering borrower concentration and the 0% risk weighting of Lebanon’s local currency sovereign debt. The bank’s Tier 1 capital ratio weakened to 10.8% at end-Q112, from 11.1% at end-2010, due to risk-weighted asset growth. The rating actions are as follows:

Long-term IDR affirmed at ‘B’; Stable Outlook

Short-term IDR affirmed at ‘B’

VR affirmed at ‘b’

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘CCC’