(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has lowered the Outlook on the Long-Term Foreign Currency Rating (LT FCR) and Bank Standalone Rating (BSR) of Arab International Bank (AIB) to Negative from Stable. The change in the outlook follows a recent similar rating action on Egypt’s sovereign outlook. The level of Egyptian government securities held by AIB is high in relation to capital. Given this factor, together with the Bank’s ownership, we therefore believe there to be a close linkage to the ratings of the sovereign. At the same time, AIB’s LT FCR and Short-Term Foreign Currency Rating (ST FCR) have been affirmed at ‘B+’ and ‘B’, respectively. CI Ratings has also affirmed AIB’s BSR of ‘b+’, Core Financial Strength (CFS) rating of ‘bb’ and Extraordinary Support Level (ESL) of Moderate.

The Bank’s BSR is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b’. The BSR of ‘b+’ remains at the same level as Egypt’s sovereign rating, and reflects the Bank’s capacity to withstand sovereign-induced economic and financial stress. Although we deem the Egyptian authorities’ willingness to provide support to be moderate in view of AIB’s significant government ownership, their financial capacity may be limited as indicated by Egypt’s sovereign ratings (‘B+’/‘B’/Negative). Therefore, as the BSR is already at the sovereign level, our ESL assessment of High does not result in any uplift for the Bank’s LT FCR.

Egypt’s operating environment risk reflects its high sovereign risk profile due to significant government borrowing needs, and long-standing balance of payments vulnerabilities which have been exacerbated following the Ukraine conflict. Our OPERA assessment also considers the sound condition of the banking system and recently increased support from the IMF and GCC countries. This support reduces (but does not eliminate) the economy’s external refinancing and macro-financial risks.

The CFS rating reflects the Bank’s good capitalisation metrics (partially due to a high share of zero risk-weighted Egyptian government securities in total assets), well established deposit base and comfortable liquidity, as well as its conservative risk appetite. Shareholder support remains an important factor underpinning the rating. AIB’s credit challenges are the high exposure to government securities, customer concentrations in the deposit base and high systemic liquidity risk, sizeable NPLs (albeit within a small loan portfolio), and the outlook for continued modest profitability.

While AIB’s business model continues to evolve in pursuit of balance sheet diversification (with a focus on increasing the level of EGP lending and funding), Egyptian sovereign exposures still constitute a very large proportion of the Bank’s consolidated asset base, although the proportion of net loans is now approaching 30%. AIB’s large exposure to sovereign risk is a common feature of the Egyptian banking sector. Given Egypt’s low sovereign rating and Negative Outlook, the consequent vulnerability to sovereign credit events continues to weigh on the quality of the asset base and potentially on capital. Capital adequacy metrics therefore need to be evaluated with this factor in mind. Profitability remains low both at the operating and net levels with key ratios being much weaker than the sector median.

Liquidity is comfortable. A large and well-established customer deposit base comprising both corporate and retail funds is the primary source of funds, but CASA balances are low. Customer deposit growth metrics are impacted by the fact that the AIB balance sheet is expressed in USD; given a depreciating local currency, a rise in EGP deposits can translate into a drop in USD terms – a factor influencing the negative deposit growth seen in H1 22. Liquid asset holdings provide an adequate buffer in local and foreign currencies. However, liquidity is subject to considerable concentration risks both in the sources of funding (government entities and large individual private sector depositors) and in the composition of liquid assets (large holdings of sovereign securities). AIB’s liquidity is therefore subject to both sovereign and systemic risks.

AIB has satisfactory capitalisation ratios but those which are based on risk weighted assets (RWAs) benefit from the high level of zero risk-weighted government securities in the asset base. RWA density has however recently been on a modestly rising trend. Balance sheet leverage is also comfortable as is the Basel III leverage ratio. However, when assessing the strength of the capital base, the potential risks from the high holdings of securities issued by a low-rated government needs to be factored in. Although capital flexibility is limited given the relatively low rate of internal capital generation, this is partially counterbalanced by supportive shareholders.

Rating Outlook

The Outlook for the LT FCR and BSR is Negative, indicating that CI expects these ratings to be lowered by one notch over the next 12 months, in line with the expected movement in the sovereign’s ratings.

Rating Dynamics: Upside Scenario

As the Bank’s LT FCR is already set at the same level as the sovereign, we do not expect a change in that rating unless either the rating or the outlook of the sovereign itself was raised. This is currently seen as being very unlikely within a 12 month timeframe.

Rating Dynamics: Downside Scenario

Although we currently see it as being unlikely, the LT FCR could be lowered by more than one notch should the rating for the sovereign itself be lowered by more than one notch. Although AIB’s financial metrics show some weaknesses, a further downgrade would appear unlikely in the absence of such a further sovereign downgrade.

Contact

Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: rory.keelan@ciratings.com
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst

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The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2018-21 and H1 2022. CI 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.

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