“We believe that political and economic tensions are easing in countries where Al Baraka Banking Group operates, and that the group has shown resilience in the impaired operating environment caused by the tensions,” S&P in a statement said.
“We are affirming our ‘BBB-/A-3’ ratings on Al Baraka Banking Group and removing them from CreditWatch negative. The negative outlook reflects the likelihood that the group’s operating environment will, over time, tarnish its financial profile and that its ambitious growth strategy could weaken its already moderate capitalization,” it added.
S&P affirmed its ‘BBB-/A-3’ long and short-term counterparty credit ratings on ABG and removed them from CreditWatch, where they had been placed with negative implications on Feb. 22, 2011. The outlook is negative.
“The CreditWatch resolution and ratings affirmation reflect the easing of political and economic tensions compared with the first half of the year in countries where the ABG group operates, as well as its resilience to the impaired operating environment caused by those tensions. Positive rating factors include the group’s strong brand recognition in Islamic banking, good funding and liquidity profile, very limited concentration within its financing portfolio, and adequate resilience of its asset quality and financial performance. However, we remain concerned because most of the countries in which the group operates are expected to remain under pressure due to heightened political and economic risk,” S&P added.
However, S&P believe that the group’s capitalization is on a negative trend.
ABG’s main subsidiary, Albaraka Turk Katilim Bankasi AS (Albaraka Turk; BB/Negative/B), is following an ambitious growth strategy that is weakening capitalization and could lead to asset quality deterioration.
The ABG group is a large Islamic banking group, primarily engaged in retail and corporate banking that had total assets of $16.3 billion on March 31, 2011. It operates in 11 countries in the Middle East, Africa, and Asia. ABG is licensed in Bahrain as a wholesale bank and regulated by the Central Bank of Bahrain, but has very limited business operations in this country. The ratings on ABG reflect the group’s stand-alone credit profile (SACP) and do not factor in extraordinary support from shareholders or authorities. ABG is about 75%-owned (directly and indirectly) and controlled by Saudi businessman Sheikh Saleh Abdullah Kamel. The ratings on ABG also take into account the absence of double leverage.
“The negative outlook reflects our belief that ABG will remain under pressure due to the impaired political and economic environments in several countries in which it operates. It also reflects our concern that the group’s sustained steady growth and limited retained earnings capacity could lead its RAC ratio before adjustments to fall to the low end of the 5%-6% range. Any significant further destabilization in countries where the group has major operations–in particular Egypt, Jordan, or Algeria–could also prompt a downgrade,” it said.
“Although we understand that the group is aiming to keep consolidated financing growth in 2011 below 15%, we are concerned about the medium-term uncertainties surrounding the impact of the unstable political environment in the MENA region on its financial profile. We could revise the outlook to stable if we deemed that the group continued to show resiliency in asset quality and was able to boost its RAC ratio to a level more commensurate with the ratings,” S&P added.
“Any appearance of double leverage at ABG would very likely trigger a negative rating action. This is because it would mean ABG’s main source of repayment was coming from the up-streaming of dividends from a very limited number of subsidiaries, whose creditworthiness we assess at below the group’s overall credit quality,” it said.