Global Arab Network - Capital Intelligence (CI) announced that it has affirmed Arab Banking Corporation (ABC)’s Long and Short-Term Foreign Currency ratings at ‘BBB+’ and ‘A2’, respectively. 

The Outlook for these ratings remains ‘Negative’, in view of considerable uncertainty in the current environment about the ability and willingness of the largest shareholder, Central Bank of Libya, to provide timely financial support in case of need.  However, the Support Level is affirmed at ‘3’, reflecting Kuwait Investment Authority’s ongoing strong support to ABC as a strategic shareholder.  Neither the United Nations Security Council nor any member state has called for any economic sanctions to be imposed on any member of ABC Group. 

ABC’s Financial Strength Rating (FSR) of ‘BBB+’ is maintained with a ‘Stable’ Outlook, reflecting its significantly improved capital adequacy, ongoing growth in operating and net profit, satisfactory asset quality and increased liquidity.  However, the Bank’s ratings remain constrained by ongoing reliance on short-term wholesale funding, although this is gradually reducing. 

The substantial capital increase in 2010 has clearly strengthened ABC’s risk profile in the face of a challenging economic environment in many Middle East and North Africa (MENA) countries.  While strategy continues to emphasize cautious expansion within the MENA region, ABC’s growing operation in Brazil provides significant diversification benefits and mitigates the increased credit risks prevailing in some of ABC’s MENA markets.  ABC has little asset exposure to Bahrain and Libya.  Despite the moderate increase in non-performing loans (NPLs), asset quality remained sound supported by more than full loan-loss reserve coverage.

With the resumption of lending, the Bank’s operating and net profit grew further on the back of ABC Brasil’s increased contribution to profitability.  While sources of income are reasonably diversified, ABC’s returns remain modest, reflecting rather low levels of income generation.  Due to the substantial capital injection and an increase in customer deposits, the Bank’s liquidity improved as surplus funds were deployed into prime bank placements.  That said, the funding base remains dependent on short-term interbank liabilities, although this funding source continued to decrease in line with ABC’s strategy to reduce dependence on repo funding. 

ABC was incorporated in Bahrain in January 1980 and operates under a wholesale banking license issued by the Central Bank of Bahrain (CBB).  Founded by governmental institutions in Kuwait, Libya and Abu Dhabi, the Bank is principally engaged in international wholesale commercial banking and trade finance, foreign exchange and money-markets, and international capital markets.  Retail banking is offered through its MENA subsidiaries.  Following the large rights issue in 2010, and the sale by Abu Dhabi Investment Authority of its shares, Central Bank of Libya currently owns 59.4% of shares and Kuwait Investment Authority 29.7%.  Individual and institutional investors hold the remaining 10.9%.  At end-December 2010, ABC’s total assets amounted to USD28.1 billion and total capital was USD3.86 billion.