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Arab Bank plc ratings affirmed

December 3, 2014 11:50 am

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Arab Bank Plc (AB)’s Long and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-‘ and ‘B’, respectively. AB’s FCRs are constrained by Jordan’s sovereign ratings (‘BB-‘/’B’/ ‘Stable’), reflecting AB’s base of operations in Jordan and its exposure to Jordanian sovereign debt. Accordingly, the Bank’s FCRs remain highly correlated with the sovereign’s creditworthiness.

The downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on the Bank’s FCRs. The Support Level remains at ‘3’ in view of the demonstrated shareholder support in case of need, as well as the high likelihood of support from the Central Bank of Jordan (CBJ). The Outlook for AB’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs.

The Bank’s Financial Strength Rating (FSR) is maintained at ‘BBB+’ on a ‘Stable’ Outlook, underpinned by the Bank’s ample liquidity, strong customer deposit base, sound capital adequacy ratio (CAR), geographically diversified balance sheet, and almost full loan-loss reserve coverage for non-performing loans (NPLs). The FSR is constrained by the still high level of NPLs, despite the recent improvement, as well as high related party exposure. Furthermore, the difficult operating environment and increased geopolitical risks in the region are likely to continue to weigh on the Bank’s asset quality. The FSR is also constrained by the still modest gross income generation, which leads to lower than sector average operating profitability. AB’s limited financial disclosure with regard to individual country exposures hinders financial analysis to some degree, and consequently is considered a ratings negative.

AB is one of the oldest, most recognized brands in Jordan and throughout the region. Its long history and solid track record have earned it the respect of its peers in key markets. Management is conservative and the shareholder base is traditionally supportive. These factors combined have provided the Bank with a resilient business model, able to withstand challenging market conditions. While AB’s geographic diversification remains unchallenged within the region, keen competition in its key markets combined with difficult operating conditions have slowed down its business expansion. This is likely to continue to restrain operating and net profit growth over the near- to medium-term, despite the solid rebound in its net profit in 2013.

Notwithstanding the further improvement in loan-loss reserve coverage in 2013, AB’s ratio of NPLs to gross loans remained comparatively high – despite the small improvement – reflecting the stressed credit conditions in many of its markets. During 2013, the Bank’s operating profit recovered on healthy net interest income growth while net profit and ROAA improved noticeably on lower provisioning. AB’s satisfactory operating profitability continues to support its provision building capability. The improved gross income generation is underpinned by AB’s multiple sources of income.

AB’s consistently strong liquidity rests on a deep, and growing, base of customer deposits. While this abundant liquidity compromises profitability to a considerable degree, it is a reflection of the Bank’s prudent lending standards and conservative asset allocation policy. The balance sheet remained well-capitalised, notwithstanding the low internal capital generation rate, mainly as a result of a rather generous dividend policy and modest profitability.

AB was established by Mr Abdul Hameed Shoman in Jerusalem, where it commenced operations in July 1930. Initially, AB expanded within Palestine and later throughout the region. In 1948, following political upheaval in Palestine, the Bank relocated its head office to Amman, Jordan. Through its operations in over 30 countries, AB has the largest Arab banking network globally.

The Bank is modeled along universal banking principles offering trade financing, merchant banking, commercial lending, real estate and international banking, private banking, and Islamic and retail banking. The principal shareholders (>4%) include the Oger Group (majority owned by the Al-Hariri family in Lebanon), the Social Security Corporation (Jordan), and the governments of Saudi Arabia. AB’s total assets at end 2013 were JOD24.5 billion (USD34.6 billion) and total capital was JOD4 billion (USD5.6 billion).