(The following statement was released by the rating agency)
LONDON/PARIS, December 11 (Fitch) 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. (BABC: BBB-/Stable) remains a
significant
contributor to the group’s overall profitability (2012: 42% of
operating
income). In May 2012, Fitch upgraded BABC 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.
Additional information is available on www.fitchratings.com
Applicable criteria, ‘Global Financial Institutions Rating
Criteria’ dated 15
August 2012, ‘Evaluating Corporate Governance’ dated 12 December
2012, ‘Country
Ceilings’ dated 09 August 2013, ‘Assessing and Rating Bank
Subordinated and
Hybrid Securities’ dated 05 December 2012 and ‘Rating Financial
Institutions
Above the Sovereign’ dated 11 December 2012, are available at
www.fitchratings.com.
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
here
Evaluating Corporate Governance
here
Country Ceilings
here
Assessing and Rating Bank Subordinated and Hybrid Securities
here
Rating Financial Institutions Above the Sovereign
here
Additional Disclosure
Solicitation Status
here
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS
LINK:
here. IN ADDITION,
RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE
ON THE AGENCY’S
PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS,
CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S
CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE
FIREWALL, COMPLIANCE
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE
FROM THE ‘CODE OF
CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.
DETAILS OF THIS
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH
WEBSITE.