International Bank of Yemen ratings action

January 30, 2014 6:24 am

Capital Intelligence (CI), the international credit rating agency, today announced credit rating action on International Bank of Yemen (IBY), based in Sana’a, Yemen. The Financial Strength Rating (FSR) is affirmed at ‘B’, but the Outlook is lifted to ‘Positive’ from ‘Stable’.

The FSR is supported by a solid capital adequacy ratio (CAR, although total capital to total assets is only moderate), good liquidity and a high level of profit at the operating level. The rating is constrained by weak asset quality and the very difficult operating environment, specifically severe weakness in the economy and the attendant risk to the Bank’s financials.

The raised Outlook reflects the increased profitability, improved CAR, deeper customer deposit position, and lower accretion rate of new non-performing loans (NPLs). Before an upgrade, CI would like to see increased loan loss provision coverage. The Long-Term Foreign Currency Rating is amended to ‘C+’ and the Short-Term Foreign Currency Rating is affirmed at ‘C’, reflecting CI’s view of country risk factors for Yemen. The Outlook for IBY’s Foreign Currency Rating is moved to ‘Stable’ from ‘Negative’.

There remains significant credit risk in Yemen reflecting the ongoing economic and political challenges. The Support rating is maintained at ‘4’, reflecting limited capacity for support from shareholders.

IBY is Yemen’s second largest bank, controlling around fifteen per cent of banking system assets in the country. Performance improved in 2012 following a slight recovery in the operating environment. In line with the Yemeni banking sector profile, IBY’s loan portfolio is very small as a proportion of total assets – despite the rise in loans in 2012 – with the major asset category comprising Yemeni government Treasury bills. Treasury bills grew further as a percentage of total assets in 2012 with funds directed from the strong increase in customer deposits. Loan asset quality is very poor reflected in a high level of NPLs against gross loans. Slight improvement in asset quality was seen in 2012, with NPLs growing at a reduced rate following the significant rise in the previous year. The gap between unprovided loans and free capital is slightly on the high side, but non-performing assets to total assets are very small.

IBY’s results were better in 2012. Profitability grew sharply, driven by higher net interest income and a much lower net provision charge. At the operating level, IBY’s performance is good and the Bank’s operating profit on average assets is the highest amongst the Yemeni banks covered by CI. This is generated by high margins and a very low cost base. IBY’s large domestic Treasury bill portfolio provides a significant and steady interest income stream. At the same time, the Bank carries high concentration risk to government paper. Liquidity is reasonable due to its large deposit base – which grew noticeably in 2012 – and a high level of liquid assets but could come under pressure through problems within the Treasury bill portfolio. The Bank’s capital position is sound with the ratio supported by the zero risk-weighting attached to Yemeni government Treasury bills.

IBY was established in January 1979 by a Presidential decree. The Bank administers its operations in the Republic of Yemen through its head office located in Sana’a and eighteen other branches (Sana’a, Aden, Hodeidah, Taiz, Seiyun and Mukalla). IBY’s shareholder base is dispersed quite widely. At end 2012, total assets amounted to YER287 billion (USD1.3 billion).

Primary Analyst
Darren Stubing
Senior Credit Analyst
Tel: +357 2534 2300