“The outlook revision reflects our expectations that ABG’s capitalization will improve in the next quarters, which would allow it to maintain a Standard & Poor’s risk-adjusted capital (RAC) ratio above 5%. It also reflects the lower pressure in the operating environments–namely Egypt and Jordan–of some of ABG’s major subsidiaries. Absent this improvement within the expected timeframe, we would reassess the components of our ratings on ABG and may revise our assessment on capital and earnings to weak from moderate,” S&P in a statement said.
“The starting point for assigning our ratings on ABG are the group’s ‘bb’ anchor, which we derive based on our view of economic risks in the countries in which it operates. The ‘bb’ anchor for the group is based on our industry risk score of ‘6’ for Bahrain (on a scale of ‘1’ to ’10’, ‘1’ being the lowest risk), where ABG is incorporated and supervised, despite the very limited activities carried in this country. We use a blended economic risk score of ‘7’, using the weighted average of economic risk scores of countries where the group operates by looking at the geographic breakdown of exposure at default at year-end 2014.
“We view the group’s business position as strong, reflecting its superior geographic diversification in earnings compared with peers’, as well as the competitive benefits it derives from its Islamic status. Although we consider the bank’s strategy to be aggressive, as it is driven by growth, risks are mitigated by the quality of management and knowledge of its key markets. Our assessment of capital and earnings is moderate, based our anticipation that our RAC ratio before adjustments will remain above 5% in the next 12-18 months, excluding any deterioration in the sovereign ratings or economic risk scores in key countries of operations and factoring in the expected improvement in capitalization that is expected to take place in the next quarters. We consider the group’s risk position to be adequate, reflecting high granularity in the financing book; resilience in asset quality, despite operations in risky countries; and lower pressure on major subsidiaries, namely those in Egypt and Jordan. We view funding as average and liquidity as adequate. As a wholesale bank licensed in Bahrain since 2002, ABG has no access to its central bank’s funding mechanisms, but all subsidiaries are self-funded and would have access to funding mechanisms provided by their domestic authorities in case of need. The group holds what we regard as a sound portion of its assets in cash and bank placements. Based on all these factors, we assess the group credit profile (GCP) at ‘bb+’.
“Standard & Poor’s outlook on ABG is stable. Our outlook reflects our expectation that the group’s capitalization will improve in the next quarters, enabling it to maintain a Standard & Poor’s RAC ratio above 5%, while we expect asset quality and financial performance to remain broadly stable over the next 12 months.
If the group’s capitalization doesn’t improve, we may revise our assessment on capital and earnings to weak from moderate and lower the ratings on ABG, unless our view of the group’s risk position improves. We might revise up our assessment of the risk position if the operating environment continues to improve and the bank continues to demonstrate a good track record of maintaining asset quality in check. A major drift in the group’s asset quality indicators or an erosion of its current liquidity buffer might also exert negative pressure on the ratings. Any appearance of double leverage at the group level could also prompt a negative rating action on ABG, as debt repayments would become highly reliant on the up streaming of dividends from a limited number of subsidiaries whose creditworthiness is lower than the overall group credit profile.
“We would raise the ratings if we see the group’s risk position improving, while we maintain our moderate assessment of capital and earnings. This could be happening in a scenario in which we are comfortable that the group’s RAC ratio will consistently remain above 5%, the operating environment in Turkey has improved significantly, and the group is maintaining its asset quality indicators at current levels.”