Global Arab Network | Negative Outlook - Moody's downgrades Bahrain-based Arab Banking Corporation

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Negative Outlook - Moody's downgrades Bahrain-based Arab Banking Corporation

Global Arab Network - - Jihad Taki

Friday, 08 July 2011 19:56

Negative Outlook - Moody's downgrades Bahrain-based Arab Banking Corporation

Global Arab Network - Moody's Investors Service has downgraded the deposit ratings of Arab Banking Corporation (ABC) by one notch to Ba1/Not-Prime, from Baa3/Prime-3. At the same time, Moody's downgraded ABC's standalone bank financial strength rating (BFSR) to D (mapping to Ba2 on the long-term scale) from D+. All the aforementioned ratings now carry a negative outlook, Global Arab Network reports according to a press statement.

Today's rating action concludes the review for downgrade initiated by Moody's on 24 February 2011.

Moody's says that positioning ABC's standalone ratings at the Ba2 level better reflects (i) the bank's continued reliance on Libyan deposits, within the context of high deposit concentrations, and (ii) the potential constraints on its franchise given that its 59% majority shareholder, the Central Bank of Libya (CBL), remains subject to sanctions imposed by United Nations, the USA and the European Union against the Libyan regime.

Moody's says that a significant proportion (27%) of ABC's highly concentrated deposit base is sourced from the CBL and from other Libyan institutions. Although Libyan deposits are currently frozen and cannot be withdrawn, there is uncertainty about what will happen to these deposits once the situation in Libya is resolved.

In light of the aforementioned sanctions, Moody's similarly considers that ABC's franchise is constrained by the uncertain status of its core shareholder, the CBL. Although, as a Bahrain-based institution, ABC is operationally independent from its shareholder and is exempt from these sanctions, the uncertainty related to its ownership status requires it to maintain greater balance sheet liquidity, potentially limiting its ability to develop new business.

According to Moody's, at the Ba2 level, ABC's standalone rating remains underpinned by strong loss-absorption capacity (reflected in a Tier 1 capital ratio of 18.4% at the end of December 2010) and by substantial liquid asset reserves that can withstand severe deposit withdrawals. The rating agency also takes into account the bank's moderate profitability, of which approximately 50% derives from its majority controlled Brazilian corporate banking subsidiary, Banco ABC Brasil. In the first quarter of 2011 ABC reported improved year-on-year revenues of US$190.0 million and net profits of US$48.0 million.

Moody's says that ABC's Ba1 deposit rating continues to incorporate one notch of parental support uplift from the Kuwait Investment Authority (KIA), which is the bank's minority shareholder with 30%, behind the CBL with 59%. The Ba1 rating is based on Moody's assumptions of a moderate likelihood of support from the KIA.

The negative outlook on ABC's ratings reflects residual uncertainty about the ownership of the bank, once the conflict in Libya is resolved and the possible impact on the franchise and funding base.

The principal methodologies used in this rating were Bank FinancialStrength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Manama, Bahrain, Arab Banking Corporation reported total assets (audited under IFRS) of US$28.1billion as at December 2010.
Global Arab Network

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