Standard & Poor’s Ratings Services said it took the following rating actions on various subsidiaries of Jordan-based Arab Bank Group including lowering its long- and short-term counterparty credit ratings on Europe Arab Bank PLC and Arab Bank Australia Ltd. to ‘BB+/B’ from ‘BBB/A-2’ and removed them from CreditWatch with negative implications. The outlooks are negative.
“We affirmed our ‘BB-/B’ long- and short-term counterparty credit ratings on the group’s main operating entity, Arab Bank PLC and its foreign branches Arab Bank PLC (Bahrain), Arab Bank PLC (Singapore), Arab Bank PLC (Dubai), and Arab Bank PLC (Qatar). The outlooks remain negative,” S&P said.
The actions follow our review of the wider implications of the deteriorated sovereign creditworthiness and resulting economic challenges for Arab Bank Group in some Middle Eastern and North African (MENA) countries, including Jordan, where the group operates.
“We believe that industry risks for Jordanian banks have increased. In our view, Jordan’s deteriorated creditworthiness is negatively affecting the banking industry. We also believe that the government’s ability to provide support for the banking system in case of need has decreased owing to a low level of financial flexibility, dependence on foreign grants, a substantial and growing public debt burden, and structural external deficits–particularly due to energy import dependence. As a result of these changes, we have revised downward Arab Bank Group’s anchor–our starting point for ratings–to ‘bb’ from ‘bb+’.
“We have also lowered our assessment of the group’s business position to “strong” from “very strong.” This reflects Arab Bank Group’s operations in high-risk MENA countries. We expect the operating environment and credit conditions in various MENA countries, especially Jordan and Egypt, to remain hostile for the group’s business and financial profiles. We also expect the group to continue to find it difficult to grow its business in MENA, which is the core of its geographical footprint and accounts for about 50% of consolidated assets. We believe that political and economic risks increased in several MENA countries in the aftermath of the Arab Spring, reducing Arab Bank Group’s diversification benefits and weighing on its business profile. The weakening of our assessment of the business position coupled with the lowering of the anchor has led us to lower the group credit profile (GCP) to ‘bb+’ from ‘bbb’.
“Our ratings on Europe Arab Bank and Arab Bank Australia reflect the GCP because we assess them as core entities of Arab Bank Group. The GCP is derived from our ‘bb’ anchor for Arab Bank Group, and our view of its “strong” business position, “adequate” capital and earnings, “moderate” risk position, “above average” funding, and “strong” liquidity, as our criteria define these terms. The GCP also takes into account the financial and operational resilience Arab Bank Group has shown since early 2011 against a more hostile backdrop in the MENA region. For instance, it has maintained a moderately stable financial profile over the period and continues to maintain a high liquidity buffer.
“The negative outlook on Arab Bank PLC and its rated branches and subsidiaries mirrors the negative outlook on Jordan. A downgrade of the sovereign would trigger a similar rating action on Arab Bank PLC and its rated branches and would also put pressure on the GCP.
“We would revise the outlook on Arab Bank PLC and rated branches and subsidiaries to stable if we revised the outlook on Jordan to stable and the operating conditions in Egypt stabilized.”