Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Arab Banking Corporation (ABC)’s Financial Strength Rating (FSR) of ‘BBB+’ on the basis of its very solid capital adequacy, geographically diversified asset base and overall sound asset quality. The FSR is also supported by the Bank’s comfortable liquidity. The factors constraining the FSR are the Bank’s ongoing reliance on short-term wholesale funding, although this is reducing, large customer deposit concentrations, tight net loans to customer deposits ratio, and the still challenging operating conditions across most MENA countries. The Bank’s Long and Short-Term Foreign Currency Ratings are maintained at ‘BBB+’ and ‘A2’, respectively. The Support Level of ‘3’ is affirmed, reflecting the demonstrated willingness and ability of the core shareholders to support the Bank. The Outlook for all the ratings is ‘Stable’.
ABC’s balance sheet was significantly transformed over the recent past, following the timely large capital injection that had occurred in the aftermath of the events that unfolded post Lehman. The balance sheet is currently solidly capitalised and provides a strong buffer in the face of a challenging economic and political environment across many Middle East and North Africa (MENA) countries. Although a significant share of the capital proceeds remains earmarked for acquisitive and organic expansion in the MENA market, the Bank has since adopted a cautious growth strategy, particularly in view of elevated credit risk across most of the region. Mitigating ABC’s risk exposure to MENA is the considerable amount of assets invested outside the region specifically in Brazil, USA and Western Europe. The Bank follows a sound credit policy, as evidenced by the low non-performing loan (NPL) ratio and more than full loan-loss reserve coverage.
The Bank’s funding profile and overall liquidity have steadily improved in recent years. The funding mix has shifted in favour of customer deposits and term funding, with surplus funds deployed into prime bank placements and, to a lesser extent, cash and equivalent assets. Nevertheless, the contribution of customer deposits to total funding remains moderate, compared to most banks in the region, while funding remains dependent on short-term interbank liabilities to some degree. Liquidity is ample and underpinned by a sizeable portfolio of investment grade marketable debt securities.
Driven by ABC Brazil’s strong performance, the Bank’s profitability at both the operating and net levels improved in 2010-2012. Although the ROAA improved again in 2013 due to lower provisioning, ABC’s operating profit to average total assets slipped marginally due to a small decline in net interest income. The latter was negatively affected by a contraction in the net interest margin amid an ongoing low interest rate environment. Nonetheless, sources of income remain adequately diversified with a good contribution from fee and commission income.
Established in 1980 in Bahrain, ABC operates under a wholesale banking licence issued by the Central Bank of Bahrain. The Bank is principally engaged in international commercial banking and trade finance, foreign exchange and money-markets, and capital markets. Retail banking is performed at some of the MENA subsidiaries. The Bank was founded by governmental institutions from Libya, Kuwait, and Abu Dhabi with the objective of bridging the gap between the large US, European, and Japanese banks, and the Arab world. Following the rights issue in 2010, Central Bank of Libya emerged as the largest shareholder with a 59.4% stake, followed by Kuwait Investment Authority with 29.7%. ABC has over the years expanded its presence across MENA. As at end 2013, the Bank’s total assets were USD26.54 billion and its total capital USD4.36 billion.
Senior Credit Analyst
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