Rating Action Commentary
ֳ Affirms Arab Bank Plc at 'BB'; Outlook Stable
Mon 28 Oct, 2024 - 9:41 AM ET
ֳ - London - 28 Oct 2024: ֳ has affirmed Arab Bank Plc's (AB) Long-Term Issuer Default Rating (IDR) at 'BB' with a Stable Outlook.
Key Rating Drivers
AB's IDRs are driven by its standalone strength, as indicated by its 'bb' Viability Rating (VR). The VR reflects the bank's geographical diversification, leading domestic franchise, stable asset quality, adequate profitability and capitalisation, and strong funding and liquidity. It also considers AB's high exposure to the Jordanian sovereign relative to equity, and the challenging operating conditions in some Middle East and North African countries.
AB's Long-Term IDR is one notch above Jordan's 'BB-' sovereign rating. In ֳ's view, the bank's credit profile benefits from geographical diversification and is also supported by good capital and liquidity. ֳ also believes the Jordanian government would not prevent AB from servicing its debt obligations in a sovereign default by imposing capital controls.
However, ֳ caps AB's VR at one notch above Jordan's sovereign rating because of its high exposure to the Jordanian sovereign relative to its equity via holdings of government securities and placements at the Central Bank of Jordan (end-1H24: 80% of equity; 85% of which is in local currency).
Geographical Diversification: AB's leading domestic market shares (25% by total assets and 21% by loans at end-2023), diverse business model, and regional and international presence support its business and earning generation, and deposit collection. However, this exposes the bank to weak and volatile low-rated regional markets (end-1H24: 1.8x common equity Tier 1 (CET1) capital).
Conservative Risk Appetite: The bank's loan book is diversified by economic sector, single obligor and geography. Risk controls are appropriate for the business risks and complexity. Loan growth is moderate. However, the bank is exposed to foreign-currency risk from its foreign branches and subsidiaries. Exposures to Palestinian territories are small, well managed and only to the West Bank (end-1H24: 3.5% of credit risk exposures; 24% of equity).
Stable Asset Quality: AB's stable Stage 2 (end-1H24: 10.5%) and Stage 3 (7.9%) loans ratios are supported by write-offs, as reflected by the Stage 3 loans generation ratio (1H24: 0.5%; 2023: 1.7%; 2022: 0.7%), and a cautious approach to risk. Foreclosed assets are minimal. ֳ expects AB's asset quality to remain stable, with a Stage 3 loans ratio of 7.6%-7.8% by end-2025, supported by lower interest rates.
Adequate Profitability: AB's annualised operating profit/risk weighted assets (RWAs) ratio has reached 3.2% in 1H24 (2023: 2.7%) due to higher net interest margin (NIM), adequate business volumes, stronger profits from associates, better cost efficiency and lower impairment charges. AB's focus on liquidity and operations in lower-risk countries pressure its NIM. ֳ expects AB's profitability to remain adequate, with operating profit at 3.4% of RWAs in 2024-2025, due to reasonable business volumes, cost efficiency and cost of risk, offsetting lower interest rates.
Adequate Capitalisation: AB's CET1 capital ratio is stable (end-1H24: 14.9%) and adequate for its reasonable asset quality, high total loss allowances coverage of Stage 3 loans (end-1H24: 137%), adequate pre-impairment operating profit (1H24: 5.4% of average gross loans; annualised), low loan concentration and low RWA density (end-1H24: 67%). ֳ expects the CET1 capital ratio to be stable at 15%-15.2% by end-2025 due to only moderate growth. AB can issue capital if needed.
Strong Funding and Liquidity: AB's geographical diversification and leading domestic franchise support its strong funding profile. Good retail deposits (57% of customer deposits) result in low deposit concentration. High current and saving accounts (48%) contribute to lower funding costs. AB channels excess liquidity into mostly investment-grade securities and interbank placements, including in highly rated markets. Liquidity is strong.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the Jordanian sovereign rating would lead to a downgrade of AB's ratings, given ֳ's assessment that AB's VR should not be more than one notch above Jordan's sovereign rating. AB's ratings could also be downgraded if ֳ estimates that the bank's ability to withstand a sovereign default has weakened, or in case of sovereign intervention impeding AB's ability to service the bank's obligations.
A weakening of the operating environment or a material expansion to weaker markets or a material erosion of capital ratios would also lead to a downgrade of AB's ratings.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of AB's ratings would require an upgrade of the Jordanian sovereign and improvements to the operating environment, combined with the bank maintaining its strong financial profile.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
The Short-Term IDR of 'B' is the only option mapping to a 'BB' Long-Term IDR.
AB's Government Support Rating (GSR) of 'b' reflects a limited probability of support from the Jordanian authorities. This considers the sovereign's weak financial flexibility and AB's high systemic importance based on its 25% market share of system assets, but also the authorities' strong willingness, in ֳ's view, to support domestic banks in order to maintain market confidence and stability given high contagion risk among domestic banks.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
AB's Short-Term IDR is sensitive to its Long-Term IDR.
AB's GSR is sensitive to ֳ's view on the sovereign ability to support the banking sector and AB.
VR ADJUSTMENTS
The operating environment score of 'bb' is above the 'b' category implied score due to the following adjustment reasons: macroeconomic stability (positive) and international operations (positive).
The asset quality score of 'bb-' is above the 'b & below' category implied score due to the following adjustment reason: non-loan exposures (positive).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Arab Bank Plc | UK Issued, EU Endorsed |