(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Outlook on the Long-Term Foreign Currency Rating (LT FCR) of Tadhamon Bank (TB) to Negative, from Stable. The Bank’s LT FCR and Short-Term (ST) FCR have been affirmed at ‘C’ and ‘C’, respectively. At the same time, CI Ratings has affirmed TB’s Bank Standalone Rating (BSR) of ‘c’, Core Financial Strength (CFS) rating of ‘c+’, and Extraordinary Support Level (ESL) of Uncertain. The BSR Outlook has been amended to not meaningful from Stable as ‘c’ is the lowest grade on our BSR scale.
The revision of the LT FCR Outlook to Negative (and concurrently the Outlook on the BSR amended to not meaningful) reflects the more volatile operating environment and heightened risk due to the escalation of tension in Yemen following attacks by the Houthis on shipping in the red Sea and its approaches and the US-led strikes against them in response.
The FCRs remain constrained by significant operating environment challenges, including elevated sovereign, political and economic risk. After nine years of civil war, the Yemeni conflicting parties – the Houthis and the Yemeni government supported by Saudi Arabia – agreed to a ceasefire in December 2023, and engaged in negotiations to reach an inclusive road map for a peace agreement under the supervision of the United Nations. However, the recent Houthi attacks will undoubtedly cloud any possible path forward.
CI views that uncertainty remains extremely high with regard to the implementation of this ceasefire agreement, as well as its durability and capacity to restore civil stability. The Houthis – supported by Iran – have pledged to stop maritime transportation through the Red Sea until the Gaza conflict is ended. This in turn has led to attacks on international ships approaching or crossing the strait of Bab El Mandeb. As a result, a 12-nation coalition – led by the US – has been formed to protect maritime routes. The US and UK have now carried out a number of joint operations against the Houthis in response to their attacks. Airstrikes have targeted a number of sites, including in Sana’a which is controlled by the Houthis. Political events, the economic crisis in the country and associated security events place substantial challenges on Yemen, and on the banking sector’s operations and individual banks’ ability to manage balance sheets and income streams. Government infrastructure and apparatus have been severely impacted. The Central Bank of Yemen (CBY) faces many difficulties in attempting to regulate, supervise and control the banking system.
The ESL is Uncertain. Consequently, the LT FCR does not incorporate any uplift for extraordinary support in the event of need. The Bank’s local majority shareholders, the Hayel Saeed Anam Group (HSA Group), are subject to the same operating environment risks as TB. CI believes that the likelihood of the Group providing sufficient and timely support to TB if needed is uncertain given the current conditions in Yemen. That said, HSA Group is one the largest commercial groups in Yemen.
TB’s BSR is derived from a CFS rating of ‘c+’ and an Operating Environment Risk Anchor (OPERA) of ‘c’, which indicates high risk. The CFS reflects TB’s (limited) financial credit strengths, including an asset profile whereby over one-third of total assets are located outside of Yemen, mainly real estate, and other investments in the Kingdom of Saudi Arabia and the United Arab Emirates. Other supporting factors include a seemingly adequate liquidity profile, underpinned by a large base of unrestricted investment and savings accounts; the customer deposit base has been quite stable over the last few years. That said, the high probability of event risk renders the liquidity position particularly vulnerable. TB has a reasonable domestic franchise as one of the largest banks in Yemen. Capital adequacy is also satisfactory, although the ratio is aided by the (low) risk weighting attached to Yemeni sovereign risk.
The CFS is constrained by weak earnings quality and income volatility, weak risk absorption capacity, and low capital flexibility. The accounts are also qualified for various factors. TB’s earnings strength in terms of revenue is low in our view. Since the civil war, operating income has been volatile, including some years of losses, reflecting the Bank’s asset profile including real estate and unquoted investments. TB recorded another loss in 2022 mainly due to realised loss of investments in subsidiary companies. This loss represents accumulated losses at Tadhamon Capital Company, Bahrain (a subsidiary with ownership 99.9%), where the Company's capital was reduced from USD34.4mn to USD18mn by accumulated losses of USD15.4mn (YER3.85bn). The loss in 2021 was due to a long running dispute with Arcapita Bank BSC which filed a legal case in the US some years ago against TB connected to a Wakala deposit. In February 2022, TB and the counterparty entered into an out of court settlement agreement, in which the counterparty agreed to withdraw its claim against TB in return for a one-off immediate payment of USD21mn (taken in the 2021 accounts).
Operating profit declined by over one-half in 2022. Operating income was flat, with most income lines weakening except fee income. Both securities income and income from real estate were lower in 2022. Foreign currency gains were also sharply down. Commissions on both letters of credit and cash transfers rose sharply in 2022 which drove higher fee income.
The main income generators of TB include the Bank’s share of income from joint and Murabaha and Istisna’a financing. In addition, the Bank derives income from real estate investments, Wakala placements, investment securities, and sukuk. Volatility in FX income is apparent due to the Bank’s international assets alongside the pressure on the Yemeni riyal. TB has revenue diversification due to its asset profile but, in tandem, impairment provisions have been high.
The Bank’s capacity to absorb provisioning expenses (financing and other impairments) remains weak as operating profit is modest. Financing credit loss absorption capacity is considered just adequate with full loan-loss financing coverage. Moreover, financing represents a small proportion of assets. However, credit exposure to the CBY, foreign banks, unquoted investments and real estate is much higher.
To a limited degree, TB’s risk profile is reduced as it has a base of assets outside Yemen. However, any increase in bad assets or large write-downs would put the capital base under pressure. Although the CAR is adequate − aided by the low risk-weighting attached to Yemeni sovereign risk − the overall capital position of the Bank provides only limited capacity to absorb shocks. Internal capital generation has been negative for the past few years and there is some uncertainty as to whether the shareholders would inject fresh capital into the Bank at the present time.
TB maintains significant asset exposure, including real estate investments and unquoted securities, in the GCC, mainly in Saudi Arabia (mostly land) and the UAE (land and buildings). It also has small exposure to very high risk countries such as Sudan and Syria. The overall international exposure is just over one-third of total assets. Its asset profile provides diversification, but also exposes TB’s earnings to volatility which has been seen over the years. Holding a large base of assets outside Yemen is advantageous, particularly given the sovereign’s current position. However, the majority of assets are still held within Yemen, as are nearly all liabilities. The Bank has significant exposure to the Yemeni government, specifically to the CBY, through placements.
Despite the challenges, TB continues to be active in remittances and letter of credit services to its clients, including corporates and individuals, but only on a small scale.
TB has confirmed to CI that it is not currently in default of any obligations.
Rating Outlook
The Negative LT FCR Outlook indicates that TB’s FCRs could be lowered by one notch over the next 12 months given the ongoing volatile conditions in Yemen’s operating environment. The increased Houthi and military attacks in Yemen and associated attendant risk make it difficult to predict how credit fundamentals will evolve going forward.
Rating Dynamics: Upside Scenario
The LT FCR Outlook could be revised to Stable over the next 12 months should tension domestically and regionally reduce, and a peace deal be agreed and followed.
Rating Dynamics: Downside Scenario
Although not our current expectation, the Negative LT FCR Outlook could be affirmed concomitantly with a rating downgrade in the event of a deterioration in the operating environment and TB’s financial metrics, particularly liquidity and capitalisation. The latter would also impact the CFS.
About the Ratings
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 FY2018-22. 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 November 2005. The ratings were last updated in March 2023. 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 assigned or maintained at the request of the rated entity or a related third party.
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 2024
MENAFN06032024002960000411ID1107941315
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.