OREANDA-NEWS. S&P Global Ratings today said it had revised its outlooks on Lebanon-based financial institutions Bank Audi S. A.L., Blom Bank sal, and Bankmed s. a.l. to stable from negative.

At the same time, we affirmed our 'B-' long-term counterparty credit ratings on each of the three banks. We also affirmed our 'C' short-term counterparty credit ratings on Bank Audi and on Bankmed.

The outlook revisions on Bank Audi, Blom Bank, and Bankmed follow our revision of the outlook on Lebanon on Sept. 2, 2016 (see "Lebanon Outlook Revised To Stable On Resilient Financial System And Deposit Inflows; 'B-/B' Ratings Affirmed," published on RatingsDirect).

The outlook revision on the sovereign reflects our view that bank deposits in Lebanon will grow sufficiently to support the government's borrowing requirement (26% of GDP in 2016) and the country's external financing requirement (89% of GDP or 151% of current account receipts in 2016). We expect bank deposits will grow by at least 4% in 2016. In our opinion, the Lebanese government's debt-servicing capacity depends materially on the domestic financial sector's willingness and ability to add to its holdings of government debt, which in turn relies on bank deposit inflows, much of which is sourced from abroad. Last year, the inflows covered net government debt issuance 2x.

Despite the three banks' good geographic diversification by regional standards and firm risk-control strategies, we consider them to be highly exposed to domestic operating conditions. This primarily includes their very large exposure to the sovereign. Lebanese government and central bank debt instruments (excluding cash and reserves at the central bank) have consistently represented a multiple of common shareholders' equity for Bank Audi, Blom Bank, and Bankmed. We understand that this exposure will remain very high at the three banks in the foreseeable future. Consequently, our ratings on the banks do not exceed those on the sovereign.

The stable outlooks on Bank Audi, Blom Bank, and Bankmed mirror our stable outlook on Lebanon. The stable outlook on the sovereign reflects our expectation that, over the next 12 months, continued deposit inflows to the financial system will remain sufficient to support the government's borrowing requirement and the country's external financing gap, despite the difficult internal and external political environments.

A negative rating action on Lebanon would trigger a similar action on the three banks. The sovereign rating action may result if deposit inflows significantly slowed or foreign-exchange reserves declined much further than we currently expect. If the domestic political gridlock escalated to a more destabilizing situation, we could also lower the ratings.

Conversely, we would raise the ratings on the three banks if we were to raise the ratings on the sovereign. This could happen if Lebanon's policymaking framework became more predictable, supporting foreign capital inflows and improving the sustainability of public finances.