Arab Bank Plc – Ratings Affirmed

(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) of ‘b+’ and Core financial Strength (CFS) rating of ‘bbb-’. The Outlook for the LT FCR and BSR remains Positive.

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 all the other countries where AB is present, as well as the strengths and weaknesses of the respective banking sectors. Despite the significant proportion of assets in the GCC, we did not adjust AB’s OPERA assessment upwards given that the majority of credit exposures and earnings are derived from the Bank’s domestic operations in Jordan. Furthermore, there is limited disclosure on geographic exposures by individual country.

The likelihood of extraordinary support in the event of need is deemed to be moderate. However, our ESL assessment does not result in any uplift for the Bank’s LT FCR because the BSR is already at Jordan’s sovereign rating level. 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’/Positive). 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 abundant liquidity, underpinned by a well-entrenched customer deposit base, much improved profitability in 2022 and into H1 23, good and enhanced CAR after the USD250mn AT1 capital issuance in October 2023, and ongoing good loan loss reserve (LLR) coverage for non-performing loans (NPLs). The ratings are constrained by the still challenging operating environment in Jordan – despite an improvement – and in all other countries where AB is present. The recently erupted conflict between Israel and Gaza, however could worsen operating and economic conditions in Jordan and the region. Also constraining the ratings are limited disclosure with regard to individual country exposures (in turn restricting our OPERA assessment) and the higher than sector average NPL and stage 2 loan ratios.

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 strong and leading market positions in Jordan, as well as good competitive advantages in other key markets in the MENA region such as Saudi Arabia, Bahrain, Oman, and Tunisia. It has a well-developed distribution network and good pricing power that is reflected in its sound (and significantly improved in 2022 and H1 23) net interest margin (NIM). These factors, along with a conservative management team, have served the business model well. Despite the adverse economic impact of the war in Ukraine, AB has the capacity to withstand challenging market conditions entailing unusually high credit costs as demonstrated in both 2020 and 2021, and to some extent in 2022.

After marginal renewed NPL (stage 3 loans net of interest in suspense) growth in money terms in H1 23, the ratio of NPLs to gross loans of 7.1% remained at a higher level than the sector average. Similarly, stage 2 loans stayed above the industry norm in June 2023, indicating ongoing asset quality strain. The pandemic-related forbearance measures the Central Bank of Jordan (CBJ) had taken, including relaxing lending and restructuring criteria (as well as granting repayment holidays to all borrowers in affected sectors) expired at end-2022. Further NPL growth in H2 23 and into 2024 is therefore not to be ruled out given the current difficult economic environment in Jordan and the region. In mitigation, LLR coverage has remained solid and more than full in June 2023, 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 as a result of good geographical diversification of assets.

AB’s geographically diversified asset base supports recurring revenue streams and good operating profitability. The Bank’s satisfactory revenue generation capacity, together with good cost control, remains better than its peers, reflecting its solid pricing power and economies of scale as the largest bank in Jordan. In turn, this produces a sound NIM; the latter improved significantly in H1 23, benefiting from higher interest rates. Revenue streams are diversified, benefiting from high and mostly recurring dividends received from subsidiaries and associates outside Jordan, as well as from fees and commissions. H1 23 saw a solid recovery in net profit and ROAA, supported by lower provisions charges and much increased net interest income (NII) – the latter benefitting from multiple interest rate hikes in Jordan and the MENA region since Q1 22. AB’s very sound operating profitability is capable of absorbing higher cost of risk if necessary.

The consistently solid funding and liquidity metrics are underpineed by a deep and granular retail customer deposit franchise in Jordan coupled with satisfactory market positions in other geographies. AB boasts a higher than sector average share of cheap CASA deposits that has favourable implications for its funding cost, which was lower than the industry norm. AB’s liquid balance sheet also reflects the low share of net loans in total assets. At the same time, reliance on wholesale funding was reasonably low, signifying low refinancing risk. The Bank’s liquidity is very sound, underscoring the significant central bank balances, bank placements and government securities, half of which were issued by the Jordanian government. 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.

The oversubscribed USD250mn AT1 capital issue in October 2023 has lifted AB’s already sound CAR to a good level. The Bank has consistently maintained a sound capital position, with CAR hovering around 200 bps above the CBJ minimum regulatory requirement of 14.5% in H1 23. The latter includes a regulatory extra 2% buffer above the normal threshold of 12% for banks with significant overseas operations, and an additional 0.5% for D-SIB status. The Bank’s CAR, which consists predominantly of CET 1 funds, provides a satisfactory buffer against any unforeseeable losses that may materialise in the prevailing high credit risk environment. Internal capital generation decreased to a low level in 2020 and 2021, hampered by very large dividend payouts. On a positive note, the rate of internally generated capital recovered to satisfactory 5.2% in 2022, supported by strengthened profitability.

Rating Outlook

The Positive outlook on the Bank’s LT FCR and BSR was assigned in December 2022 (following a revision of Jordan’s sovereign rating outlook to Positive) and indicates that the ratings are likely to be raised by one notch in the next 12 months, provided the sovereign’s ratings are upgraded as currently expected. This is because the Bank’s LT FCR and BSR are currently at the sovereign’s long-term rating of ‘B+’, and our assessment of the likelihood of official extraordinary support being made available to the Bank in the event of need is Moderate.

Rating Dynamics: Upside Scenario

Although unlikely, the LT FCR and BSR could be upgraded by more than one notch, or by one notch coupled with a Positive Outlook, if there is a similar action on Jordan’s sovereign ratings and a significant improvement in the operating environment.

Rating Dynamics: Downside Scenario

Although not our current expectation, the LT FCR and BSR Outlook could be revised to Stable or lowered were there to be a similar action on the Jordanian sovereign. Alternatively, downward pressure on the ratings could also be exerted if the Bank’s key credit metrics and OPERA deteriorate significantly.

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 FY2019-22 and H1 2023. 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 December 2022. 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

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