(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Arab Bank Plc (AB) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed AB’s Bank Standalone Rating (BSR) and Core Financial Strength (CFS) rating at ‘b+’ and ‘bbb-’, respectively. The Outlook for the LT FCR and BSR remains Stable.
The Bank’s BSR is derived from a CFS rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘b+’, and is constrained by Jordan sovereign risk factors. OPERA takes into account both current and projected economic and financial conditions in Jordan and the other countries where AB is present, as well as the strengths and weaknesses of the respective banking sectors. Despite the large proportion of assets in GCC and North Africa, we did not adjust AB’s OPERA assessment given that a majority of credit exposures and earnings are derived from the Bank’s domestic operations in Jordan, as well as from countries with a similar operating environment.
Our Extraordinary Support Level (ESL) assessment of Moderate does not result in any uplift for the Bank’s LT FCR because the BSR is already at the sovereign level. The likelihood of extraordinary support in the event of need is deemed to be moderate. While CI believes the willingness of the government to provide support remains high, its financial capacity is considered moderate as indicated by Jordan’s sovereign ratings (‘B+’/‘B’/Stable). The Bank’s LT FCR remains constrained by the ratings assigned to the sovereign, reflecting its significant base of operations in Jordan and its relatively high exposure to Jordanian sovereign debt.
The ratings are supported by AB’s strong franchise and geographically diversified balance sheet, alongside significant operations in GCC countries, North Africa, Europe and Australia. Also supporting the ratings are consistently ample liquidity underpinned by an entrenched customer deposit base, very sound operating profitability and good loan loss reserve (LLR) coverage for NPLs. The ratings are constrained by the worsened operating environment in Jordan and in the other countries where AB is present due to the Covid-19 pandemic and the resultant effects on loan asset quality. Also constraining the ratings are limited disclosure with regards to individual country exposures, in turn, restricting our OPERA assessment, the rising and higher than sector average NPL and stage 2 loan ratios, and modest CAR.
AB has a solid track record of sound performance as one of the oldest and most recognised brands in Jordan and throughout the region. The Bank has maintained a strong market position in Jordan, as well as good competitive advantages in other key markets in the MENA region like Saudi Arabia, Bahrain, Oman, and Tunisia. It has a developed distribution network and good pricing power that is reflected in its sound net interest margin (NIM). These factors, along with a conservative management team have served the business model well. Despite the adverse economic impact of Covid-19, AB has the capacity to withstand challenging market conditions entailing unusually high credit costs as demonstrated in 2020 and into H1 21.
Reflecting new classified credits mainly from the corporate segment, growth in NPLs (stage 3 loans net of interest in suspense) accelerated in 2020, in common with many Jordanian banks after the onset of Covid-19. Accordingly, the ratio of NPLs to gross loans surpassed the sector average although it stabilised in H1 21. Similarly, stage 2 loans have also increased to a level above the industry norm in June 2021, indicating ongoing asset quality pressure. Further growth of NPLs therefore is not to be ruled out given the current difficult economic environment in Jordan and the region, particularly when the Central Bank of Jordan’s (CBJ) forbearance measures end soon (see next paragraph). In mitigation, LLR coverage has remained solid and more than full in June 2021 after stepping-up provisions, denoting good loss absorption capacity. Overall asset quality, however, is to some extent impacted by the high concentration in low-rated Jordanian government securities (in common with many local banks). Nonetheless, AB’s relative exposure in Jordanian government securities is much lower than many other Jordanian banks thanks to good geographical diversification of assets.
The pandemic has added a threat to Jordan’s economic growth potential, as well as in other markets where AB has significant operations. Although the authorities have eased lockdown restrictions, GDP was adversely impacted in 2020 and into the current year. Real GDP growth might also settle at a lower level for some time after the pandemic is brought under control. As a result of the economic contraction, the reduction in incomes and business turnover has negatively impacted the asset quality of all Jordanian banks. The steps taken by the CBJ, including relaxing lending criteria (as well as granting repayment holidays for all borrowers – recently extended until December 2021 for affected sectors) and easing rules on loan restructuring, have masked asset quality erosion in the banking system.
AB’s geographically diversified asset base supports recurring revenue streams and good operating profitability, factors which proved vital in recent years after the Bank had to significantly step up provisioning for substantial litigation costs and IFRS 9 related credit charges. Notwithstanding a sharp decline in 2020 due to elevated loan loss provision charges, AB’s earnings strength, especially its satisfactory revenue generation capacity together with good cost control, remains better than its peers. This reflects the Bank’s solid pricing power and economies of scale from being the largest player in Jordan. Revenue streams are diversified, benefiting from high and mostly recurring dividends received from its subsidiaries and associates outside Jordan, as well as from recurring fees and commissions. Although H1 21 saw some recovery in net profit and ROAA, earnings will almost certainly be pressured from ongoing significant provisions in 2021 – as is the case with all Jordanian banks – as further growth in NPLs is not to be ruled out in the short term. In mitigation, AB’s very sound operating profitability is capable of absorbing higher cost of risk derived from its operations in the MENA region. CI considers AB as having very sound capacity to withstand adversities among peer banks.
Current funding and liquidity metrics are good based on an entrenched customer deposit franchise in Jordan and satisfactory market positions in other geographies. AB’s liquid balance sheet also reflects the low share of net loans to total assets. At the same time, reliance on wholesale funding was moderately low signifying low refinancing risk. The Bank’s liquidity is very sound, underscoring the significant holdings of central bank balances, bank placements and Jordanian government securities. Although the latter are not listed and lack an active secondary market, they are repoable with the CBJ and constitute an important source of liquidity.
Even though not impaired by unprovided NPLs like other Jordanian banks, CI considers AB’s capital position to be modest. The Bank’s CAR, which consists mainly of CET 1, provides a just adequate buffer against any unforeseeable losses that may materialise in the prevailing high credit risk environment. Supported by earnings retention in prior years, AB managed to rebuild CAR to the 14.5% threshold in 2020 as mandated by the regulator for systemically important banks with significant overseas operations. Nonetheless, internal capital generation was marginal in 2020 as the Bank declared a large cash dividend which was equivalent to almost 3.5 times the 2020 net profit. Cash dividends in respect of 2019 profit had been prohibited after CBJ instructed all banks to retain earnings in order to enhance capital buffers amid the deteriorating operating environment and rising credit risks.
Rating Outlook
The Stable Outlook reflects CI’s expectation that AB’s ratings are not likely to change over the next 12 months. Supported by ample liquidity and very sound operating profitability, AB continues to display considerable resilience despite the negative economic effects of the Covid-19 pandemic. We expect this to remain the case over the short term.
Rating Dynamics: Upside Scenario
For the LT FCR and BSR to rise by one notch, CI’s assessment of Jordan’s sovereign risk would have to improve. Such a reassessment is not likely in the short term.
Rating Dynamics: Downside Scenario
A one notch reduction in the Bank’s BSR and LT FCR would take place were there to be a downward reassessment of sovereign and broader operating environment risks. Alternatively, downward pressure on the CFS would also be exerted if the NPL ratio increases significantly, in turn negatively impacting profitability and the currently modest capital adequacy through elevated provision charges.
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd
The following information source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2017-20 and H1 2021. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in September 1999. The ratings were last updated in November 2020. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.
The ratings have been initiated by CI. The following scheme is therefore applicable in accordance with EU regulatory guidelines.
Unsolicited Credit Rating
With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2021
MENAFN23112021002960000411ID1103234793
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.