Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Arab Banking Corporation (ABC)’s Long and Short-Term Foreign Currency ratings at ‘BBB+’ and ‘A2’, respectively.
In view of the removal of asset freezes on ABC’s majority shareholder, the Central Bank of Libya (CBL), following political transition in Libya, CI assesses that the uncertainty surrounding the ability and willingness of CBL to provide timely financial support in case of need, has significantly diminished.
Accordingly, the Outlook for the Long-Term Foreign Currency rating reverts to ‘Stable’ from ‘Negative’. The Support Level is affirmed at ‘3’ reflecting the high likelihood of support from the core shareholders.
The Bank’s Financial Strength Rating of ‘BBB+’, on ‘Stable’ Outlook, is also affirmed. ABC’s ratings are supported by its very solid capital adequacy, sound asset quality, continued growth in operating and net profit, and adequate liquidity.
The ratings are constrained by the Bank’s continued reliance on short-term wholesale funding, although this is reducing.
ABC’s large capital increase in 2010 had clearly strengthened its risk profile in the face of a challenging, economic environment in many of the Middle East and North Africa (MENA) countries. Although a significant share of the proceeds was earmarked for acquisitive and organic growth in its respective markets, the Bank has since adopted a cautious stance in view of heightened credit and political risk factors across much of the MENA region.
At the same time, however, ABC’s growing operation in Brazil provides significant diversification benefits and mitigates these risks. ABC has little asset exposure to Bahrain and Libya. Asset quality remained sound in the year under review as shown by a marginal decline in non-performing loans and more than full loan-loss reserve coverage.
As a result of the substantial capital injection and ongoing deleveraging exercise, the Bank’s funding profile and overall liquidity have improved in recent years. The funding mix has shifted in favor of customer deposits with surplus funds deployed into prime bank placements and, to a lesser extent, cash. That said, the customer deposit base remains rather limited and funding remains dependent to some extent on short-term interbank liabilities.
On the back of ABC Brazil’s strong performance in recent years, profitability at both the operating and net levels continued to recover, due to further increases in net interest and non-interest income.
Although ABC’s credit portfolio contracted marginally in the year under review, a growing interest differential contributed to the increase in net interest income. Sources of non-interest income are adequately diversified.
Established during 1980 in Bahrain, ABC operates under a wholesale banking license issued by the Central Bank of Bahrain. The Bank is principally engaged in international wholesale commercial banking and trade finance, foreign exchange and money-markets, and international capital markets.
The Bank was founded by governmental institutions from Libya, Kuwait and Abu Dhabi, with the objective of bridging the gap between the large American, European and Japanese banks, and the Arab world.
Following the rights issue in 2010, CBL emerged as the largest shareholder with a 59.4% stake, followed by Kuwait Investment Authority with 29.7%. Over the years, ABC has expanded its presence across the Middle East and North Africa (MENA). At end 2011, total assets were $25.01bn and total capital #4.02bn.
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