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Fitch Affirms Arab Banking Corporation at 'BBB-'; Outlook Stable
November 2, 2017 / 5:25 PM / 22 days ago

Fitch Affirms Arab Banking Corporation at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, November 02 (Fitch) Fitch Ratings has affirmed Arab Banking Corporation's (ABC) Long-Term Issuer Default Rating (LT IDR) at 'BBB-' with Stable Outlook. Fitch has also affirmed the bank's Viability Rating (VR) at 'bbb-'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND SUPPORT RATING ABC's LT IDR is driven by the bank's standalone strength, as reflected by the VR. ABC's Support Rating (SR) is driven by potential institutional support from one of the bank's founding shareholders, the Kuwait Investment Authority (KIA). Although the other founding shareholder, the Central Bank of Libya (CBL), has historically been supportive of ABC, its ability to provide support and timeliness of support cannot be relied on. The Central Bank of Bahrain regulates all licenced banks in Bahrain, but Fitch does not factor in any Bahraini sovereign support in the ratings of Bahraini wholesale banks, including ABC. The bank's ratings are not constrained by the Bahrain Country Ceiling of 'BBB+', reflecting that the majority of ABC's assets and liabilities are outside of Bahrain, and would not be subject to Bahraini transfer and convertibility risks, in Fitch's view. VR ABC's VR incorporates Fitch's view of the bank's good fundamental credit quality. The bank has good prospects for ongoing viability, reasonably stable financial metrics and Fitch expects improvement of the bank's loan- and financing-quality and profitability. ABC's fundamentals are adequate, so that there is a low risk that it would have to rely on extraordinary support to avoid default. However, adverse business or economic conditions in more challenging markets are more likely to impair this capacity. ABC benefits from a diversified geographical operating environment in the Middle East and North Africa (MENA) region including the Gulf Cooperation Council (GCC), but also in Western Europe and North America. This supports the bank's business generation, but also funding and liquidity. Fitch's assessment also incorporates the bank's exposure to volatile and less developed markets. ABC has a nominal franchise due to limited market shares in the countries where the bank operates. However, the franchise is solid due to a geographical footprint and ABC's wholesale banking expertise. ABC is a regional player that benefits from cross-selling opportunities, trade finance flows and intra-group synergies. It is a well-known brand that attracts large and good-quality clients. The bank also benefits from the shareholders' ordinary financial support, especially funding. ABC has a competent management team that is experienced in regional and international banking, with sound expertise in wholesale banking. Fitch views this as necessary to support some of the bank's complex corporate transactions. The bank's strategic objectives are documented and consistent. ABC's management shows strong, improving strategic implementation but this will remain sensitive to the cyclical and volatile operating environment. ABC's balance sheet is well-balanced between liquid and non-liquid assets. Fitch recognises that the bank has fairly prudent underwriting standards for loans, financing, investments and placements in the context of volatile markets. However, similar to regional peers, concentrations are the main risks but remain lower than regional peers' as ABC benefits from diversification. Fitch's assessment incorporates the bank's tight risk controls and appropriate responses to any weaknesses in its portfolio, especially in Brazil.. ABC's market risk primarily arises from foreign currency exposures that originate from the bank's investments in subsidiaries. ABC's loan- and financing-quality metrics remain adequate and compare well with peers', albeit weakened in 2015 and 2016 due to tough operating conditions in MENA and Brazil. Its impaired loans and financing ratio increased to 4.1% (end-2016) from 3.4% (end-2015) but has stabilised in 1H17. Fitch's assessment also includes the increase in loan and financing restructuring and reclassification (especially in Brazil) that has put pressure on the bank's asset quality. However, Fitch views positively the risk approach of the ABC group, especially in Brazil and the measures taken to counterbalance the markets' volatility. As a result, loan and financing quality metrics have started to stabilise in 1H17. Reserve coverage is adequate and in line with peers'. Investments, interbank placements and other liquid assets, which represent about 50% of total assets are of good quality with low impairments in securities, and support ABC's asset-quality. Loan and financing concentrations and exposure to volatile and less developed markets are the main risks. ABC's stable net interest and profit margins (supported by good repricing capabilities), strengthened non-interest income, improved cost-efficiency and supported profitability in 2016 and 1H17. However, ABC's profitability remains sensitive to local competition, local currency's volatility and higher loan and financing impairment charges (LICs). The bank's profitability remains below peers' average and pre-2015 levels but still reflects the ability to generate sufficient capital internally. Fitch expects ABC's profitability to improve due to stable LICs and economic recovery. ABC's Fitch core capital (17.5% at end-1H17) and tangible leverage (14.6%) ratios are stable and higher than peers' average despite FX translation adjustments that absorbed about 13% of equity at end-1H17 but which Fitch expects to remain stable in 2017. Capital ratios remain well above minimum regulatory requirements and internal targets. Risk absorption capacity is adequate for the bank's risks. ABC has no hybrid instruments in its capital structure and core capital represented 92% of its total capital base at end-1H17. Internal capital generation is acceptable given the bank's capitalisation level. Fitch's assessment incorporates the bank's capacity to issue capital, which is supported by shareholders, although this is not needed. Fitch expects capitalisation and leverage to remain adequate but considers this as a necessity due to the group's presence in volatile and less developed markets and in light of concentrations, while capital would not be totally fungible. Similar to regional peers, ABC's high reliance on wholesale funding (only 12% of customer deposits are from individuals) results in deposit concentration (the top 20 deposits represented 64% of total customer deposits at end-1H17), but the largest depositors are governments, government-related entities and large corporates, which Fitch expects to be stable and mitigate liquidity maturity mismatches. Fitch's assessment includes ABC's efforts to source more stable and diversified retail deposits to reduce concentration and dependability risks. The bank's debt issues have supported ABC's funding profile, with no significant refinancing risks. ABC also benefits from the longstanding ordinary funding support of its shareholders in terms of deposits and term borrowings. ABC's liquidity is well-managed and liquidity risk remains contained. Fitch views this as necessary to offset deposit concentration. The loans and financing/deposits ratio has decreased and was in line with peer average at end-1H17. This was due to the reclassification of non-bank financial institutions deposits, ABC's success to convert some term borrowings into term deposits and organic growth of deposits. The bank benefits from short-term contractual maturity profile of its assets (55% mature within one year; 27% within one month at end-1H17). Liquidity flexibility is underpinned by a large stock of liquid assets that represented 38% of total assets and 68% of customer deposits at end-1H17. This offsets the bank's net interbank borrowing position. Liquidity coverage and net stable funding ratios are high. SENIOR UNSECURED DEBT ABC's senior unsecured debt rating is aligned with the bank's LT IDR. RATING SENSITIVITIES IDRS AND SR ABC's LT IDR will move in line with the bank's VR, although in an unlikely scenario of a multi-notch downgrade of VR, the IDR may become support-driven, as implied by the SR. The SR is sensitive to a change in Fitch's view of the ability or willingness of KIA to provide institutional support, if needed. As ABC's LT IDR is not constrained by the Bahraini Country Ceiling, its IDR is not sensitive to negative rating action on the Bahraini sovereign. VR ABC's VR could be upgraded if the bank reduces its financing and deposit concentrations and improves its profitability. Strong implementation of the bank's restructuring strategy in Brazil and continuous prudent approach to MENA, stabilising and improving the bank's loan- and financing-quality could generate upside for the VR. Downside pressure on the VR could arise from the risk of an escalation of political and social unrest in the bank's markets, especially in Brazil and MENA. Material deterioration in the profitability and asset quality of ABC's Brazilian subsidiary could also have a negative impact on the rating, in light of the subsidiary's significance to group profitability. SENIOR UNSECURED DEBT The senior unsecured debt rating is sensitive to the same considerations that might affect ABC's LT IDR. The rating actions are as follows: Long-Term IDR affirmed at 'BBB-'; Stable Outlook Short-Term IDR affirmed at 'F3' Viability Rating affirmed at 'bbb-' Support Rating affirmed at '3' Senior unsecured debt affirmed at 'BBB-' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Gilbert Hobeika Associate Director +44 20 3530 1004 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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