“The rating action follows the affirmation and removal of our ratings on the Kingdom of Bahrain (BBB/Negative/A-3) from CreditWatch negative on July 20, 2011, and reflects AUB’s limited exposure to Bahrain and its good resilience to the deteriorated operating environment. We believe the bank is to some extent insulated from Bahrain-related risks. We also took some comfort from the fact that the group holds a substantial portion of its liquidity offshore, including through its foreign subsidiaries. However, we believe that the ratings on the bank remain linked to some extent to the situation in Bahrain,” S&P in a statement said.
“The affirmation takes into account AUB’s limited credit exposure to Bahrain, as well as its adequate funding and liquidity position, which has demonstrated good resilience in a turbulent operating environment in the first half of 2011. AUB’s exposure to Bahrain declined in the first half of the year, and accounted for just 12% of its consolidated assets on June 30, 2011. In addition, its asset quality and financial performance somewhat outpaced our expectations,” it added.
“AUB’s exposure to the domestic commercial real estate market, however, remains a negative rating factor. It stood at about $800 million on June 30, 2010, a low 3% of total assets, with an average loan-to-value ratio of about 43%, leaving some room to absorb further price corrections.”
“The stable outlook reflects our view that AUB’s business and financial profile are expected to remain relatively unchanged over the next two years. The bank’s good geographic diversification should help it to be resilient to the current worsened operating environment in Bahrain, and maintain its financial profile at a level commensurate with the current ratings.
“The outlook also factors in our expectation that AUB will maintain its asset quality and liquidity metrics at their current adequate levels. While our risk-adjusted capital (RAC) ratio for AUB, before adjustments, is lower than for peers at 6.3% at Dec. 31, 2010 (excluding the aforementioned capital raised in 2011), we expect the bank’s core earnings to continue providing it with an adequate cushion to absorb risks. We expect the bank to repeat its first half operating performance for the rest of 2011. This should support its capitalization, as we expect subdued balance sheet growth.
“The probability of a positive rating action on AUB appears remote at this point as it would hinge upon an improvement in the bank’s SACP and an improvement in the operating environment. In particular, strengthening in the bank’s RAC ratio to a level closer to those of its peers and reductions in real estate exposure and single-party concentrations could prompt us to consider an upgrade of its SACP.
“A substantial deterioration in AUB’s core profitability or asset quality, or an increase in its exposure to Bahrain-related risks, would trigger a negative rating action. In addition, a downgrade of our sovereign ratings or our T&C assessment on Bahrain by more than one notch would also trigger a downgrade of the bank’s ratings.