Fitch Ratings has upgraded Arab Banking Corporation’s (ABC) Long-term Issuer Default Rating (LT IDR) to ‘BB+’ from ‘BB’ and Viability Rating to ‘bb+’ from ‘bb’. The Outlook on the LT IDR is Stable.
The upgrades reflect ABC’s strong capitalisation, comfortable liquidity position, and stable asset quality indicators. Fitch also notes ABC’s resilient operating performance, including in 2011, despite significantly challenging external events. ABC’s business model of geographical diversification has served the bank well, in particular its Brazilian subsidiary (Banco ABC Brasil S.A; ‘BB+’/Stable) which continues to be a major contributor to the group’s profitability (2011: 48% of total operating income).
ABC’s ‘BB+’ LT IDR is now driven by its standalone financial strength. Fitch considers it likely that one of the bank’s main shareholders, the Kuwait Investment Authority (KIA; 29.7%), would support ABC if required. While the agency also believes that the bank’s majority shareholder, the Central Bank of Libya (CBL; 59.4% stake), would be willing to support ABC, the CBL’s ability to do so cannot be assessed in the absence of a rating on the Libyan sovereign.
ABC’s ratings are sensitive to the ongoing political uncertainty in Libya, as well as the risk of an escalation of political and social unrest in the Middle East and North Africa (MENA) countries in which ABC has a presence. Fitch notes that total exposure to Bahrain, Egypt and Tunisia is fairly modest. The ratings are also sensitive to the performance of ABC’s Brazilian subsidiary, given its significance to the group’s profitability. Any material deterioration in the profitability or asset quality of Banco ABC Brasil S.A. could have a negative impact on ABC’s financials and result in a negative rating action. However, Fitch currently views this unlikely, as reflected in the Stable Outlook.
ABC faced significant negative headwinds in many of its key markets in 2011. The United Nations Security Council (UNSC) imposed economic sanctions and asset freezes on Libyan institutions, including the CBL in early 2011. No direct sanctions or restrictions were imposed specifically on ABC or its subsidiaries, but deposits sourced from the CBL, a major provider of funding to ABC, were temporarily frozen. Economic sanctions were largely lifted in December 2011. ABC also has a presence in several MENA economies that experienced elevated political and social unrest in 2011 (Bahrain, Egypt and Tunisia).
Despite these challenges, as well as some balance sheet shrinkage (total assets down 11% yoy), ABC’s operating profits increased 33% yoy to $376million, underpinned by good revenue growth, improved margins and a modest impairment charge ($28million). Cost efficiency is adequate and in line with its closest peers. Fitch expects operating profitability to improve modestly in 2012, boosted by the bank’s regional trade finance operations and further growth in its Brazilian operations.
Funding remains mainly wholesale, with significant deposits sourced from Libya, as well as other regional government/quasi-government entities. The deposit book is highly concentrated, but has historically been stable. Importantly, Fitch notes that Libyan deposit balances were stable following the lifting of sanctions in December 2011. The bank also has some longer-term funding ($1.5billion), of which approximately half matures in June 2012. In Fitch’s view, the bank has adequate resources to fully service this repayment. ABC’s loans/deposits ratio remains above 100%. However, a large and stable core MENA institutional deposit base as well as a relatively short-term loan portfolio supports liquidity. At end-2011, 52% of loans mature within one year. Capitalisation is strong with regulatory Tier 1 and Fitch core capital ratios of 19.2% and 19.8%, respectively, at end-2011.