Dec 11 2013
Affirms 3 Others
Fitch Ratings-London/Paris-11 December 2013: Fitch Ratings has upgraded
Arab Banking Corporation
‘s (
ABC
) Long-Term Issuer Default Rating (LT IDR) to ‘BBB-‘ from ‘BB+’ and its Viability Rating (VR) to ‘bbb-‘ from ‘bb+’. At the same time Fitch has upgraded
BBK
B.S.C’s (
BBK
) LT IDR to ‘BBB’ from ‘BBB-‘ and revised its Support Rating Floor (SRF) to ‘BBB’ from ‘BBB-‘.
The subordinated debt ratings of both banks have been upgraded by one notch, mirroring the upgrades of the banks’ LT IDRs. All other Bahraini banks’ ratings were affirmed. A full list of rating actions is provided at the end of this rating action commentary.
The upgrade of
ABC
‘s LT IDR and VR reflects the bank’s improved funding profile, continued resilient operating performance, strong capitalisation and healthy asset quality. In July 2012 and July 2013,
ABC
received a total USD2bn in five-year funding from its core shareholders, the
Central Bank of Libya
(
CBL
: 59.4% stake) and the Kuwait Investment Authority (KIA: 29.7% stake), enabling
ABC
to access longer-tenor funding at attractive pricing.
The upgrade in the LT IDR and SRF of
BBK
equalises the ratings with those of its closest peer,
National Bank of Bahrain
(
NBB
). Both banks are leading retail and commercial banks in Bahrain, with similar market shares and large government stakes. Therefore, the Bahraini sovereign support assumptions of both banks have now been aligned.
The rating actions follow a periodic review of the Bahraini banks. Fitch will publish the main findings of this review in a report “Bahraini Banks: Key Issues and Trends”, that will be available at www.fitchratings.com.
KEY RATING DRIVERS – IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The IDRs of three of the Bahraini banks are support-driven from different sources given the banks’ differing ownership structures.
BBK
‘s IDRs, Support Rating and SRF are driven by support from the Bahraini sovereign (BBB/Stable). Fitch’s view of support for
BBK
is based on its systemic importance as a major retail and corporate bank in Bahrain, and the Bahraini authorities’ high propensity to support domestic commercial banks.
BBK
is 32% owned by the Bahraini government, which also supports Fitch’s view on sovereign support.
Ahli United Bank BSC’s (AUB) IDRs and Support Rating reflect the high probability of institutional support from its core shareholder, the Public Institute for Social Security (PIfSS), an arm of the State of Kuwait (AA/Stable), which holds an 18.5% stake. The very strong links between PIfSS and AUB date back to before the creation of AUB, and include PIfSS’s strong interest as shareholder in both AUB and its Kuwaiti subsidiary (12.2% stake). Nevertheless, support from PIfSS is constrained by Bahrain’s Country Ceiling (BBB+) and the Stable Outlook reflects that on the Bahraini sovereign ratings.
Although the Central Bank of Bahrain (CBB) regulates all licenced banks in Bahrain, Fitch does not factor any Bahraini sovereign support in the ratings of the wholesale banks, Gulf International Bank (GIB) and
ABC
.
GIB’s IDRs and Support Rating are driven by the extremely high probability of support from the bank’s longstanding majority shareholder, the Public Investment Fund of Saudi Arabia (AA-/Positive; 97.2% stake), despite the bank being licenced and headquartered in Bahrain. Extraordinary support for GIB from the Saudi authorities has been clearly demonstrated in the past. The ratings are not constrained by the Bahrain Country Ceiling, reflecting GIB’s wholesale banking licence, its US-dollar assets and liabilities and its very limited exposure to Bahrain.
The LT IDRs of both
National Bank of Bahrain
(
NBB
) and
ABC
are driven by their respective VRs (i.e. standalone strength). In the case of
NBB
, the Support Rating and SRF are based on the high probability of sovereign support from the Bahraini authorities, if required. This view is based on
NBB
‘s leading domestic franchise and its significant Bahraini government ownership (49%). The Support Rating of
ABC
is driven by potential institutional support from its founding shareholders, the
CBL
and the KIA. While support from the
CBL
is difficult to assess, Fitch would expect some degree of solvency support from the KIA.
RATING SENSITIVITIES – IDRS, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The IDRs, Support Ratings and SRFs of
NBB
and
BBK
are sensitive to a negative rating action on the Bahraini sovereign rating, or a change in Fitch’s view on the willingness of the authorities to provide support to the banks.
AUB’s IDRs and Support Rating are sensitive to any change in Fitch’s view of PIfSS’s ability or propensity to provide support or to changes in Bahrain’s Country Ceiling. An upward revision of Bahrain’s Country Ceiling would lead to an upgrade of AUB’s Long-term IDR by one notch. The IDRs would be downgraded if there is a downgrade of Bahrain’s Country Ceiling or if Fitch believes that PIfSS’s ability or willingness to support has diminished.
GIB’s IDRs and Support Rating are sensitive to a downgrade of the sovereign rating of Saudi Arabia, or a change in Fitch’s view on the willingness of the Saudi authorities to support the bank. The agency considers this unlikely at present, given the Positive Outlook on the sovereign rating.
ABC
‘s Support Rating is sensitive to a change in Fitch’s view on the ability or willingness of
CBL
and KIA to provide institutional support, as needed.
KEY RATING DRIVERS – VR
The performance of the Bahraini banks has been notably resilient in recent years, despite domestic and regional political unrest since early 2011. Deposit outflows that occurred during 1H11 largely reversed and stabilised, with no emergency support required by the leading retail banks. However, there may have been some reputational impact on Bahrain as a stable regional financial centre, which will continue for some time, in Fitch’s view.
The loan books of each of the Fitch-rated Bahraini banks have different geographic risk profiles, as a result of the banks’ different business models and strategies. As wholesale banks,
ABC
and GIB have very limited exposure to Bahrain, despite being headquartered there. The domestic retail banks (
BBK
and
NBB
) have a more significant presence in the domestic market, and so are generally more constrained by the local operating environment. AUB is geographically diversified, with significant operations in Kuwait and elsewhere in the Middle East and the UK, with Bahrain on-shore operations contributing less than 13% of the group’s profit.
AUB’s VR reflects the bank’s solid operating profitability, despite the challenging operating environment in some of its markets, and its sound liquidity and funding base. Asset quality metrics are strong and compare well with peers’. The loan book is somewhat concentrated, but this is mitigated at group level by its geographic and sector diversification and the group’s largely highly rated investment portfolio. Corporate governance is generally a negative rating consideration in the region, although Fitch believes that this has been addressed better by the AUB group than some of the other rated banks in the region.
The VR of
ABC
reflects the bank’s resilient operating performance, strong capitalisation, comfortable liquidity position, geographical diversification and improved funding position, while also considering concentrations on both sides of the bank’s balance sheet and its exposure to highly volatile markets in the Middle East/North Africa (MENA) region. In particular,
ABC
‘s Brazilian subsidiary, Banco
ABC
Brasil S.A. (B
ABC
: BBB-/Stable) remains a significant contributor to the group’s overall profitability (2012: 42% of operating income). In May 2012, Fitch upgraded B
ABC
one-notch to ‘BBB-‘ (see ‘Fitch Reviews Ratings of Five Brazilian Mid-Sized Banks’, dated 09 May 2012 on www.fitchratings.com).
BBK
‘s VR is underpinned by its satisfactory and fairly resilient financial performance, despite the uncertain operating environment in Bahrain. Its well-established franchise and satisfactory funding and liquidity indicators are important rating drivers. The VR also considers
BBK
‘s historically weak asset quality and capital ratios that lag those of its closest peers’. Fitch notes that
BBK
‘s underlying NPL ratio (which excludes fully-reserved NPLs) is healthier than the headline ratio.
BBK
‘s management has indicated that they will consider a capital increase to improve capital ratios, once the Central Bank of Bahrain has given guidance on Basel 3 minimum capital requirements.
GIB’s VR reflects the bank’s improving asset quality, comfortable liquidity and strong capital position, while also considering GIB’s subdued operating profitability and the execution risks of expanding into retail banking in Saudi Arabia. Despite these risks, Fitch views GIB’s entry into the Saudi retail market as positive, and will likely benefit the bank’s diversity of earnings and funding over the medium-term.
The VR of
NBB
reflects the bank’s leading domestic franchise, consistent profitability, generally healthy asset quality, very strong capitalisation and sound liquidity. They also consider
NBB
‘s reliance on a small and competitive domestic environment and high concentrations in both loans and deposits.
RATING SENSITIVITIES – VR
AUB’s VR could be sensitive on the downside if asset quality and liquidity deteriorate significantly or if its Fitch Capital Core (FCC) ratio is severely eroded. Upside potential is currently limited, considering concentration in the loan book as well as the uncertain operating environment in Bahrain and elsewhere in the Middle East, notably Egypt.
ABC
‘s ratings are sensitive to the on-going political uncertainty in Libya, and the risk of an escalation of political and social unrest in MENA. Any material deterioration in the profitability and asset quality of
ABC
‘s Brazilian subsidiary could also have a negative impact on the ratings, in light of its significance to the group’s profitability. Upside potential for
ABC
‘s ratings could arise from stronger profitability and measured progress in the bank’s strategy to expand its regional franchise.
Upside potential to
BBK
‘s VR would likely stem from an improvement in the bank’s asset quality metrics and a stronger capital position. Downside risk to the VR could arise if the socio-political climate in Bahrain materially deteriorates – which is not Fitch’s central scenario – if asset quality considerably weakens or if the negative trend in
BBK
‘s capital ratios continues to worsen from current levels.
Downside risk to GIB’s VR could arise from a prolonged delay in the new retail strategy becoming profitable or negative developments eroding the bank’s healthy capital buffer. These could come, for example, from uncontrolled loan growth, a spike in NPLs or rapid expansion into new international investments, none of which are in Fitch’s base-case assumptions. An upgrade would likely result from improved profitability metrics and tangible evidence that the new expansion strategy is successfully gaining traction.
Upside potential for
NBB
‘s VR is somewhat limited at present because of the uncertain operating environment in Bahrain, while downside risk might arise from further deterioration in
NBB
‘s asset quality.
KEY RATING DRIVERS – SUBORDINATED DEBT
The subordinated debt of
ABC
, AUB,
BBK
and GIB are rated one notch below the banks’ respective LT IDRs, reflecting Fitch’s view that institutional support (
ABC
, AUB and GIB) and sovereign support (
BBK
) would flow through to all senior and Basel II Lower Tier 2 subordinated debt issuance, even though, as per Fitch’s criteria, subordinated debt would typically be notched down from the VR. The one notch reflects loss severity relative to average recoveries.
RATING SENSITIVITIES – SUBORDINATED DEBT
The subordinated debt ratings are sensitive to the same considerations that might affect each of the bank’s LT IDRs. In addition, it is sensitive to any potential change in Fitch’s assumptions relating to support in the Gulf for bank subordinated debt.
The rating actions are as follows:
AUB:
Long-term IDR affirmed at ‘BBB+’; Stable Outlook
Short-term IDR affirmed at ‘F2’
Viability Rating affirmed at ‘bbb’
Support Rating affirmed at ‘2’
Senior unsecured debt affirmed at ‘BBB+’/’F2’
Subordinated debt affirmed at ‘BBB’
ABC
:
Long-term IDR upgraded to ‘BBB-‘ from ‘BB+’; Stable Outlook
Short-term IDR upgraded to ‘F3’ from ‘B’
Viability Rating upgraded to ‘bbb-‘ from ‘bb+’
Support Rating affirmed at ‘3’
Senior unsecured debt upgraded to ‘BBB-‘ from ‘BB+’
Subordinated debt upgraded to ‘BB+’ from ‘BB’
BBK
:
Long-term IDR upgraded to ‘BBB’ from ‘BBB-‘; Stable Outlook
Short-term IDR affirmed at ‘F3’
Viability Rating affirmed at ‘bb+’
Support Rating affirmed at ‘2’
Support Rating Floor revised to ‘BBB’ from ‘BBB-‘
Senior unsecured debt upgraded to ‘BBB’ from ‘BBB-‘
Subordinated debt upgraded to ‘BBB-‘ from ‘BB+’
GIB:
Long-term IDR affirmed at ‘A’; Stable Outlook
Short-term IDR affirmed at ‘F1’
Viability Rating affirmed at ‘bbb-‘
Support Rating affirmed at ‘1’
Senior unsecured debt affirmed at ‘A’
Subordinated debt affirmed at ‘A-‘
NBB
:
Long-term IDR affirmed at ‘BBB’; Stable Outlook
Short-term IDR affirmed at ‘F3’
Viability Rating affirmed at ‘bbb’
Support Rating affirmed at ‘2’
Support Rating Floor affirmed at ‘BBB’
Contact:
Primary Analyst
Philip Smith
Senior Director
+44 20 3530 1091
Fitch Ratings Limited
30 North Colonnade
London E14 5GN
Secondary Analyst
Shaun Miskell
Associate Director
+971 4 424 1210
Committee Chairperson
Eric Dupont
Senior Director
+33 1 4429 9131
Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com.
© Press Release 2013
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