Lebanon's biggest banks are working hard to broaden their range of activities, but their domestic market remains constricted, largely short-term in orientation and vulnerable to any downturn in the government's fortunes, according to analysis by leading credit rating agencies.

Four of Lebanon's top banks have been rated by Moody's Investors Service - Banque Audi, Banque du Liban & d'Outre Mer, Banque de la Mediterranee and Byblos Bank. Banque Audi has also been rated by Standard & Poor's and IBCA. All were rated at the agencies' sovereign ceilings for Lebanon. The agencies note that the banks are starting to diversify their business away from a reliance on treasury bills and short-term credit, moving into investment banking and consumer lending. But Moody's, usually the most pessimistic of the agencies, warns that the outlook for the economy is uncertain, public debt is swelling and the currency remains vulnerable to crises of confidence.

Moody's assigned the same grades to all four banks - B2 for long-term deposits, Not Prime for short-term deposits and D for financial strength. Banque Audi and Byblos Bank's grades have a positive outlook, so could be upgraded in time. The agency also rated the various debt securities issued by the four banks, which have maturities of up to five years, at B1.

Banque Audi was rated by S&P at BB- for long-term and B for short-term and foreign currency credit. IBCA assigned it a long-term rating of BB, short-term and individual ratings of B and a legal rating of 2T, which reflects the fact that the government would probably support the bank if need be, though its operating environment is an uncertain one. Before now, Lebanese banks were rated only by the Cyprus-based Capital Intelligence, which covers the Middle East and Asia. The ratings come at a time when the country's 80 or so banks are going through a phase of consolidation, with big banks looking to buy smaller ones.

As well as diversifying into new business lines, the big banks are increasing their capital and lending for longer periods, backed by the medium-term funds they have raised through a series of international debt issues. Moody's says it expects gaps to open up between the ratings of different banks as those institutions with better management and strategy pull ahead of the others.