(MENAFN- Fitch Ratings) Fitch Ratings - Dubai - 13 Dec 2021: Fitch Ratings has revised the Outlook on Jordan-based Arab Bank Plc's (AB) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BB'. A full list of rating actions is below.
Challenges to the Jordanian economy from the coronavirus pandemic continue to put moderate pressure on domestic banks. However, challenges have subsided sufficiently to remove the negative outlook on the 'bb-' operating environment score. The latter is sufficiently low to absorb any mild deterioration, already incorporating low GDP/capita, below-potential GDP growth, high unemployment and a difficult regional environment. The Central Bank of Jordan (CBJ) support measures have helped shield domestic banks and the economy from further deterioration.
The Stable Outlook on AB also reflects the Stable Outlook on Jordan's sovereign rating, which constrains the bank's ratings at their current level (see 'Fitch Revises Jordan's Outlook to Stable; Affirms at 'BB-', published 07 December 2021).
The Stable Outlook on AB also considers the stabilisation of the operating environment in some of the bank's main foreign markets, in particular Saudi Arabia, UAE and Europe.
Fitch has withdrawn AB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned AB a Government Support Rating (GSR) of 'b'.
KEY RATING DRIVERS
IDRS AND VIABILITY RATING
AB's 'BB' Long-Term IDR is driven by its standalone strength, as indicated by its 'bb' Viability Rating (VR).
The VR reflects the bank's geographical diversification in the Gulf Cooperation Council (GCC) and outside the MENA region, as well as its adequate capital ratios, strong funding franchise, well-managed liquidity and the progressive recovery in profitability. The VR also considers the bank's high exposure to the Jordanian sovereign relative to its equity and to the challenging operating conditions in some countries in the MENA region.
AB's VR is above Jordan's sovereign rating (BB-/Stable) as Fitch considers that the bank's capital and liquidity positions would allow it to weather a sovereign default. This in turn reflects its low exposure to the Jordanian sovereign in foreign currency (about USD900 million; equal to 10% of consolidated equity), small recourse to domestic bank funding, high capital flexibility through asset sales and large holdings of liquid assets (cash and placements along with some high-quality investment securities) in and outside Jordan (including in Europe and other highly rated sovereigns), which would help offset the negative impact of a potential sovereign crisis.
Fitch also believes that the Jordanian government would not prevent AB from servicing its debt obligations in case of a sovereign default by imposing capital controls.
Fitch caps AB's VR at one notch above Jordan's sovereign rating because of its high exposure to the Jordanian sovereign relative to the bank's equity via holdings of government securities (7% of total assets and 43% of total equity at end-1H21 on a consolidated basis, or 10% and 77%, respectively, on an unconsolidated basis).
AB's Stage 3 loans ratio increased to 8.9% at end-2020 due to pressure in the construction, manufacturing and services sectors, leading to more restructuring, rescheduling (Stage 2 loans ratio was high at 15.8% at end-3Q21), write-offs, and higher generation of potential problem loans (change in Stage 3 and Stage 2 loans plus write-offs; 7.9% of average gross loans in 9M21, 4.7% in 2020, 2.2% in 2019). The Stage 3 loans ratio declined to 8.2% at end-3Q21 owing to the consolidation of Oman Arab Bank (OAB). Fitch expects mild pressure on loan quality in 2022, particularly if the CBJ does not extend the loan moratorium period throughout 2022. AB has a large stock of high-quality liquid assets (exceeding 40% of total assets at end-3Q21). Reserve coverage of Stage 3 loans is high (115% at end-3Q21).
AB's net income decreased by 77% in 2020 due to subdued loan growth, lower interest rates and business volumes, lower profits from associates and higher loan impairment charges (LICs) from the pandemic. AB's focus on liquidity and operations in lower-risk countries also puts pressure on margins. AB's net income rebounded by 26% in 9M21 but is likely to remain below pre-pandemic levels in 2021. Nevertheless, AB's annualised pre-impairment operating profit was adequate at 3.6% of average gross loans in 9M21, providing the bank with acceptable buffers to absorb losses through the income statement.
AB's common equity Tier 1 (CET1) ratio is adequate (15.3% at end-3Q21), given the bank's reasonable asset quality, high reserve coverage of Stage 3 loans and below-average loan book concentration. The bank has low risk weighted assets' density of below 70%, benefiting from the deployment of liquidity at the CBJ and the sovereign as well as highly rated regional and international counterparties. CET1 represented a high 91% of the total capital base at end-3Q21. Tangible leverage is high (15.3% at end-3Q21). Capitalisation could be pressured in 2022 by weak profitability and some asset quality deterioration. However, AB can issue capital if needed.
AB's geographical diversification and leading domestic franchise support its strong funding profile. Granular customer deposits accounted for 90% of non-equity funding at end-3Q21, and 58% of customer deposits were retail deposits, suggesting low deposit concentration. AB channels its excess liquidity into investment securities and interbank placements in highly rated markets. Net liquid assets covered about 43% of customer deposits at end-1H21 on a consolidated basis.
GSR
Fitch has assigned AB a GSR of 'b', at the same level as the country's domestic systemically important banks' (D-SIB) GSR. The latter is below Fitch's typical D-SIB GSR for 'BB-' rated sovereigns with a high propensity to provide support (0-1 notch below the sovereign rating).
AB's GSR reflects a limited probability of support from the Jordanian sovereign due to constraints on the latter's ability to provide support given its weak financial flexibility. However, Fitch believes the willingness of the Jordanian authorities to provide support would be high given AB's systemic importance and the banking sector's importance to the economy and the country's development plans.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
AB's VR and Long-Term IDR are sensitive to deterioration in its operating environments, as well as material weakening in asset quality, profitability and capital.
A deterioration in the Stage 3 loans ratio exceeding 12% could also lead to a VR downgrade.
A further weakening in AB's profitability, with the operating profit/risk-weighted assets ratio remaining below 1.25% on a sustained basis could also lead to a VR downgrade, especially if pre-impairment operating profit is not sufficient to shield capital buffers from asset-quality deterioration.
A material deterioration in AB's CET1 ratio to below 12% could also lead to a downgrade of the VR.
AB's ratings are sensitive to a downgrade of the Jordanian sovereign, given Fitch'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 Fitch estimates that the bank's ability to weather a sovereign downgrade weakens, or in case of sovereign intervention, impeding AB's ability to service the bank's obligations.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the bank's VR and GSR would require an upgrade of the Jordanian sovereign.
VR ADJUSTMENTS
The Operating Environment score of 'bb' has been assigned above the 'b' category implied score for Jordan due the following adjustment reasons: Macroeconomic Stability (positive) and International Operations (positive).
The Asset Quality score of 'bb-' has been assigned above the 'b' category implied score for AB due the following adjustment reasons: Non-Loan Exposures (positive) and Underwriting Standards and Growth (positive).
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit
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.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The GSR is driven by Jordan's sovereign rating.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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.

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