Fitch Ratings has affirmed Byblos Bank's Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook, Short-term IDR at 'B' and Viability Rating (VR) at 'b'. A full list of rating actions is at the end of this release. Byblos' Long-term IDR is driven by its intrinsic strength, expressed by its VR. Byblos's Long-term IDR and VR reflect the strong correlation between sovereign and bank risks due to Byblos's 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 Byblos' strong domestic franchise, resilient profitability and large (stable) deposit base. Byblos' Outlook is underpinned by economic and political developments, both within Lebanon and in the wider region (namely in neighboring Syria). A prolonged weakening of the operating environment, significant deterioration in asset quality or substantially reduced profitability could result in downward rating pressure. Upside potential is limited at present and would depend on a material improvement in the bank's main operating markets. Byblos continued to generate profit growth, albeit at a slower rate, due to higher non-interest income and solid cost control, and despite stronger provisioning and sector-wide margin pressure. Byblos's exposure to Syria (primarily via its banking subsidiary; 4% of consolidated assets at end-Q112) is a potential concern in light of the unrest in the country but the bank's liquidity provides some buffer. Fitch expects broadly stable profits in 2012. Byblos's single largest credit exposure is the Lebanese sovereign; such exposure accounts for nearly half of the balance sheet, while loans only represented 24% of the bank's balance sheet at end-2011. Asset quality ratios are healthy and non-performing loans are fully covered by reserves (end-2011: 139%). Funding is almost entirely comprised of contractually short-term (stable) customer deposits, which continued to grow in 2011 and underpin the bank's liquidity. The bank's low loans/deposits ratio (end-2011: 32%) reflects the nature of the Lebanese banking system, whereby deposits primarily fund government (and other) securities, as opposed to lending. Capital ratios are acceptable considering borrower concentration risk and the 0% risk-weighting of Lebanon's local currency sovereign debt. Byblos's Fitch core capital ratio was 14.3% at end-2011 and compared well with domestic peers. Byblos is Lebanon's third-largest bank by assets. It offers a broad range of corporate, retail and investment banking services, supported by an extensive domestic branch network and international subsidiaries. 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'
