The ‘BBB-/A-3’ long- and short-term counterparty credit ratings on ABC remain on CreditWatch, where we placed them with negative implications on March 21, 2011. The CreditWatch placement also applies to all Standard & Poor’s ratings on the bank’s debt instruments, according to Standard & Poor’s Ratings Services said, while commenting on its CreditWatch placement of Bahrain-based ABC.
“The CreditWatch status reflects our opinion of the potential impact the prevailing political and social unrest in Libya could have on the bank’s financial and business profiles. It also factors in the sanctions imposed on Libya by various countries that adopted the UN Security Council Resolution 1970 passed earlier this year. We believe that the implications for ABC are still uncertain as the bank’s largest shareholder is the Central Bank of Libya (CBL). In addition, the situation continues to pose reputational risks and potential governance challenges for the bank,” S&P said.
ABC’s largest Libya-related financial risk is its funding reliance on very large deposits coming from Libyan entities, including but not limited to CBL. These deposits are now frozen as they are subject to UN sanctions. The future stability of these funds following a normalization of the situation in Libya remains unclear. Still, under our base-case scenario, we do not think that these funds will immediately be fully withdrawn when the situation stabilizes in Libya and the sanctions are lifted.
“In order to address potential unexpected large deposit withdrawals, the bank has built sizable liquidity reserves which would give it ample room to address potential short-term stress. On June 30, 2011, about one third of the bank’s assets were in the form of cash plus short-term bank placements. On top of that it had $7.2 billion in securities providing a large additional buffer to cover any foreseeable short-term funding needs. ABC has not suffered from substantial deposit withdrawal in the past six months and it received additional funding from its second major shareholder. Its customer deposits stood at $11.8 billion on June 30, 2011, about $600 million more than at year-end 2010,” it maintained.
“The CreditWatch status takes into account the risks from the heightened and prolonged disorder in Libya, which we believe could weigh on ABC’s business and financial profiles. The status also reflects our weaker economic outlook for the Middle East and North Africa (MENA) region. We expect to resolve the CreditWatch within the next three months, once we have more visibility on conditions in Libya and their impact on ABC’s governance, future strategy, reputation and overall financial profile. During that time we will also reassess trends in asset quality in the whole MENA region,” S&P added.
“If no significant clarification in the situation in Libya is evident within the next three months, we could lower the ratings on the bank to reflect continuing strategic uncertainties and potential gradual weakening of its SACP as a result of negative impact on business volume and risk profile. Alternatively, we could affirm the ratings, depending on our updated view of the bank’s resilience when faced with a prolonged period of uncertainty, although this scenario is less likely. A CreditWatch negative listing will not necessarily result in a downgrade,” it said.