Banque Bemo SAL -- Moody's downgrades Banque Bemo to Baa1.lb/LB-2; negative outlook maintained

RATINGS RATIONALE

The downgrade and maintenance of a negative outlook reflects (1) Bemo's significant exposure to the increasingly stressed Syrian operating environment; (2) Moody's expectation that associated losses and rising provisioning charges will seriously dampen the bank's profitability; and (3) the rating agency's view that the bank's thin capitalisation buffers offer limited protection against rising asset-quality pressures.

The principal driver of today's rating action is Bemo's material exposures to the Syrian market. Moody's notes that in addition to the bank's direct lending to Syrian-based borrowers -- recorded as part of Middle East and North Africa (MENA) loans, which accounted for 7.7% of the bank's total loan book according to its 2011 financial statements -- Bemo maintains a 22% stake in Banque Bemo Saudi Fransi (BBSF), Syria's largest private bank. Bemo's investment in BBSF is equity accounted and constitutes around 28% of Bemo's shareholder equity, according to the bank's 2011 financial statements. In light of the severe deterioration of operating conditions in Syria, Moody's expects BBSF's financial performance to remain impaired for the foreseeable future, which will in turn weaken significantly Bemo's profitability and potentially its franchise. According to the bank's 2011 financial statements, BBSF accounted for an estimated 34% of Bemo's 2011 pre-tax profits.

In addition to the losses that will likely accrue from Bemo's Syrian operations, Moody's expects the bank's earnings-generating capacity to be further constrained by Lebanon's economic slowdown and fragile political landscape. Moody's anticipates that growth in the Lebanese economy will slow to 3.0% in 2012 (against an average of 8.1% between 2007 and 2010), which will likely result in an increase in loan-loss provisioning requirements and subdued business generation in Bemo's home market. The bank's H1 2012 (unaudited) results reflect the impact of these trends, with bottom line profitability down 85% (on H1 2011) to LBP1.1 billion, which was primarily driven by a LBP2.0 billion allowance for impairment of loans and advances (H1 2011: LBP0.1 billion) and a LBP1.5 billion loss contribution from BBSF.

Today's rating action also reflects Bemo's weak capitalisation metrics, which leave the bank vulnerable to increasing pressures arising from the bank's deteriorating asset quality and losses from its Syrian operations. Moody's notes that the bank's capitalisation buffers can withstand very limited asset-quality-related pressures, given that as at YE2011 its regulatory capital adequacy ratio was 9.8% (according to the bank's 2011 financial statements), which is below the 10% regulatory minimum that will be introduced at year-end 2012.

WHAT COULD CHANGE THE RATING - UP/DOWN

Upward ratings pressure is unlikely over the near term, as reflected in the negative outlook. However, the outlook could be revised to stable if (1) political conditions in the region normalise; (2) Syria-related risks to the bank's performance and capitalisation are contained; and (3) capitalisation increases to levels comfortably above the new regulatory minimum.

Downward ratings pressure would arise as a result of (i) accelerated asset-quality deterioration and sustained high borrower concentrations; or (ii) evidence of a permanent impairment to the bank's income-generating capacity and franchise; or (iii) the bank's inability to meet the new minimum capital requirements.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

As of the end of December 2011, Banque BEMO had total assets of LBP 2,233 billion (US$ 1.49 billion) and is headquartered in Beirut, Lebanon.

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".lb" for Lebanon. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

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