Fitch Ratings has affirmed Arab Banking Corporation’s (ABC) long-term issuer default rating (IDR) at B+ with a stable outlook.
ABC’s Long-term IDR is driven by its Viability Rating (VR), and reflects the bank’s strong capitalisation and comfortable liquidity position, while also considering ABC’s concentrated funding profile and its exposure to highly volatile MENA economies (Bahrain, Egypt, Tunisia and Jordan). The Support Rating of ‘3’ is based on expected support from the bank’s main shareholders, the Central Bank of Libya (CBL – 59.4% stake) and the Kuwait Investment Authority (KIA – 29.7%). The CBL’s ability to support ABC is difficult to assess in the absence of a rating on the Libyan sovereign. The state of Kuwait is rated ‘AA’/Stable Outlook. The subordinated debt rating is notched off ABC’s VR.
“Net income was mildly weaker in 2012, largely due to a negative FX translation effect on the Brazilian subsidiary’s results. Underlying trends in core earnings generation were broadly positive, with a modest improvement in net interest income and net fees. Fitch believes earnings in 2013 should benefit from continued growth in the loan book and an improved net interest margin (NIM). ABC’s Brazilian subsidiary (Banco ABC Brasil S.A; ‘BB+’) continues to be a major contributor to the group’s overall profitability (2012: 42% of total operating income),” Fitch in a statement said.
“Impaired loans declined to 3.2% of total gross loans at end-2012 (2011: 3.5%) and the reserve coverage ratio was strong at 137%, boosted by a large stock of collective reserves. Fitch does not expect a material deterioration in asset quality in 2013. ABC is predominantly wholesale funded, with high reliance on deposits from Libyan institutions and other regional government/quasi-government entities. The balance of ABC’s funding is largely sourced from the interbank market (27% of funding) and longer-term borrowings (9%). Funding from repurchase agreements (repos; 2%) declined substantially in 2012, following the sale of a large portion of ABC’s low-yielding ‘AAA-rated’ securities portfolio.”
“ABC’s liquidity position is comfortable, in Fitch’s view. Liquid assets, consisting of cash, interbank placements, reverse repos and unpledged securities represented about 41% of total assets at end-2012, equivalent to about 59% of total deposits. Capitalisation is strong, with regulatory Tier 1 and Fitch Core Capital ratios of 18.6% and 19.4%, at end-2012. Fitch believes the bank’s capital cushion is sufficient to support either organic growth or a bolt-on acquisition, if a suitable opportunity were to arise that complements ABC’s existing regional franchise.
“ABC’s ratings are sensitive to the on-going political uncertainty in Libya, as well as the risk of an escalation of political and social unrest in the MENA region. Fitch notes that total combined exposure to Bahrain, Egypt, Tunisia and Jordan is currently fairly modest. ABC’s VR and IDRs are also sensitive to the performance of ABC’s Brazilian subsidiary, given its significance to the group’s profitability. Any material deterioration in the profitability or asset quality of Banco ABC Brasil S.A. could have a negative impact on ABC’s financials and result in a negative rating action. The subordinated debt rating is sensitive to any movement on ABC’s VR.”