“The rating action follows our review of the wider implications of deteriorated sovereign creditworthiness in the past 12 months in some countries in the Middle East and North Africa (MENA) , where ABG operates, especially Egypt and Jordan. We recently took a similar rating action on Arab Bank Group entities,” S&P in a statement said.
“We have lowered our assessment of ABG’s risk position to “adequate” from “strong,” owing to its operations in high-risk MENA countries. We consider that economic risks incurred by banks operating in these countries, including ABG’s subsidiaries, have heightened. Although we acknowledge that the group’s overall resilience to these risks has so far been good, we expect the operating environment and credit conditions in the MENA region, especially Jordan and Egypt, to remain tough over the coming 12-18 months. Consequently, we foresee an adverse impact on the group’s business and financial profiles. ABG’s Jordanian and Egyptian subsidiaries accounted for about one third of the group’s funded and unfunded exposures as of Dec. 31, 2012, and include sizable direct MENA sovereign exposures,” S&P added.
“The ratings remain supported by ABG’s strong business position, and its average funding and adequate liquidity position. We view positively the group’s balanced business model, superior geographic diversification, and the competitive benefits it derives from its status as an Islamic bank. The quality of management and clarity of strategy are other positive factors, especially for a group operating in volatile, risky markets. The group’s funding profile is average. All its subsidiaries are wholly funded by customer deposits, in line with their respective domestic peers. The group’s subsidiaries would have access to funding mechanisms provided by their domestic authorities in case of need. In addition, we believe that the currently adverse economic and political conditions in most of ABG’s markets are testing subsidiaries’ deposit bases, which have so far proven largely unaffected.”
“The negative outlook reflects our view that ABG’s capitalization could deteriorate to levels we would deem as weak if, for instance, Egypt defaults and further economic stress materializes in Jordan.”
“We think the group’s ensuing modest earnings capacity may not be sufficient to sustain a risk-adjusted capital (RAC) ratio before adjustments above 5.0% over time, especially if further deterioration in our sovereign ratings or economic risk scores occurs in Jordan or Egypt.
“Any appearance of double leverage at group level would likely also trigger 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 we assess as lower than the overall group credit profile.
“We could revise the outlook to stable if we concluded that ABG demonstrates strong resilience in asset quality and if we became confident that it is able to maintain an estimated RAC ratio before adjustments above 5.0% on a sustainable basis, even under increasingly stressed conditions, specifically in Egypt and Jordan. A major improvement in the credit conditions of the group’s operating environment could also trigger an outlook revision to stable,” it added.