Bahrain-based Arab Banking Corporation (ABC) become the fifth major financial institution whose ratings have been either lowered or placed on CreditWatch negative due to unfolding events in Bahrain and the greater MENA region.
Standard & Poor’s Ratings Services on Wednesday has lowered its long-term counterparty credit rating on to ‘BBB’ from ‘BBB+’.
It subsequently placed its ‘BBB’ long-term and ‘A-2’ short-term ratings on the bank on CreditWatch with negative implications. These rating actions equally apply to all of our ratings on ABC’s debt instruments.
“The actions follow those on Libya, which reflect our reappraisal of political risks in the country,” said Standard & Poor’s credit analyst Goeksenin Karagoez.
ABC is 59.4% owned by the Central Bank of Libya and we classify it as a government related entity (GRE). We assess its link with the Socialist People’s Libyan Arab Jamahiriya (BBB+/Watch Neg/A-2) as “very strong” and its role as “important.” Another key shareholder is the Kuwait Investment Authority (KIA), one of the bank’s founders, which holds a 29.7% stake in ABC. We acknowledge the strong track record of support provided by these state bodies. Indeed, they demonstrated their commitment to ABC in June 2008 by increasing the bank’s capital by $1.1 billion, and by another $1.0 billion in March 2010.
However, the recent downgrade of Libya means that we no longer factor into the ratings on ABC the likelihood of timely and sufficient extraordinary support from Libya for the bank. This is in line with our methodology and assumptions to rate GREs. Consequently, the ratings on ABC currently reflect its stand-alone credit profile (SACP), which we assess at ‘bbb’. If the local currency ratings on Libya were to remain at their current levels, a deterioration of the bank’s SACP (assuming it remains above ‘bb’), would not trigger a lowering of the ratings on the bank.
The bank’s SACP reflects our view of its strong wholesale customer franchise in the Arab world, increasing geographical diversification, relatively low single party concentrations, and relatively low exposure to riskier real estate markets. These factors are mitigated by ABC’s lack of a strong core home market, weak profitability, short-term and concentrated wholesale funding profile, and challenging new business strategy. On a positive note, ABC has a limited presence in Libya. While it recently acquired a 49% stake in Benghazi-based Mediterranean Bank SAL for about $60 million, we do not consider this to be of significant risk for the ratings.
“The CreditWatch placement reflects our view of the risk of both further negative ratings actions on Libya and a weakening of the bank’s SACP owing to the negative developments in some countries in which it operates,” said Karagoez.
In our opinion, S&P said, ABC’s asset quality could weaken due to the deterioration of the operating environment in the MENA.
“A mitigating factor is the bank’s strong capitalization, following its most recent capital increase and a conservative dividend policy. We consider ABC’s heavy reliance on short-term funding, including repurchase agreements, to be a negative rating factor. Given the current unrest in Bahrain, we will monitor carefully the functioning of the domestic payment and interbank systems and the stability of the bank’s deposit base. On a positive note, the bank benefits from historically sticky deposits from regional institutions, including its shareholders, governments, and central banks,” the Agency in a statement said.
“We expect to resolve the CreditWatch status on the bank within the next three months. A CreditWatch listing does not necessarily mean a rating change is inevitable. Our rating decision will depend mainly on our updated assessment of Libya’s ratings as well as the SACP. In addition to bank’s future strategy to overcome potential funding challenges and subsequent implications for its liquidity position.”
“The extent of any likely deterioration in asset quality and operational performance in 2011-2012,” it added.