(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed AAIB’s Long-term Foreign Currency Rating (LT FCR) and Short-term Foreign Currency Rating (ST FCR) of ‘B’. At the same time the Bank Standalone Rating (BSR) of ‘b’, Core financial Strength (CFS) rating of ‘bb’, and Extraordinary Support Level (ESL) of High have also been affirmed. The Outlook on the ratings remains Stable.
AAIB’s BSR is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b’ (indicating significant risk). The CFS is underpinned by strong ownership (Egyptian and Kuwaiti governments) and by the expectation that the shareholders will continue to provide a high degree of ordinary support. The quality of the Bank’s corporate and investment banking franchise is also a major non-financial factor supporting its business and operational profile. As indicated above however, the focus on corporate banking exposes AAIB to concentration risks in both loans and deposits. The key rating supporting factors are the Bank’s satisfactory capital position and sound liquidity. Both capital and liquidity buffers are significant and provide substantial support to the Bank’s overall risk profile in what remains a somewhat difficult operating environment – although the risk-weighted capital adequacy metrics are boosted by the zero-weighting of AAIB’s holdings of Egyptian government securities.
As the BSR is already at the sovereign level, our ESL assessment of High does not result in any uplift for either the Bank’s LT FCR or BSR. The high likelihood of extraordinary support is pinned on the Bank’s strong sovereign ownership, namely the Kuwait Investment Authority (KIA) − Kuwait’s sovereign wealth fund − and to a lesser degree, the Central Bank of Egypt (CBE). Being a strategic Kuwaiti government entity, the KIA is deemed to have the capacity and willingness to provide support in case of need. We also consider the CBE to be very willing to provide extraordinary support, although its financial capacity may be more limited as indicated by Egypt’s sovereign LT FCR of ‘B’ with a Stable Outlook.
OPERA reflects Egypt’s still high sovereign risk profile due to significant government borrowing needs, and long-standing balance of payments vulnerabilities which were exacerbated following the Ukraine conflict. These vulnerabilities were compounded by the effects of the Gaza war on Suez Canal revenues and the impact of the conflict on tourism. OPERA also takes into account the still fairly sound condition of the banking system and the substantial additional support received this year from an enhanced support programme from the IMF and increased FDI from GCC countries.
In financial terms, the bank is well capitalised in terms that do not depend on the zero-weighting of Egyptian government securities while liquidity is underpinned by a strong and rapidly growing base of customer deposits. Loan asset quality (an area of some weakness in the past) is now moving towards becoming a credit strength with NPLs falling both as a ratio of gross loans and, more importantly in money terms – down by almost 38% since end-2021 – with loan-loss reserve (LLR) coverage that is now full.
The main credit challenges remain unchanged, although the degree of the strongest challenge (the difficult operating environment) has lessened to a limited extent – a reflection of improvements seen in economic prospects during the course of the first half of the current year subsequent to the enhanced level of IMF funding support and a large flow of FDI from Abu Dhabi. Concentrations in both loan assets and customer deposits remain a credit challenge, although the low 26% share of net loans in total assets reduces the impact of concentrations in the loan book. As regards customer deposits, almost half now come from retail depositors. Moreover, planned further reductions in balance sheet concentrations has a prominent place in AAIB’s revised strategy.
Loan asset quality has been on an improving trend (with NPL growth in money terms being negative in both 2022 and 2023), as has LLR coverage. Loan assets however made up only 26% of total assets at end-2023, reducing to some degree the influence of loan asset quality on the Bank’s overall risk profile. As for non-loan assets, the quality of interbank placements is considered as being satisfactory. Although the investment securities portfolio contains a significant proportion of Egyptian government paper (where asset quality here is closely linked to the credit risk profile of the sovereign) it also includes a smaller – but still significant – component of investment grade foreign debt securities component. Egyptian government securities made up just under 16% of total assets (albeit that this represented an amount equivalent to 121% of equity).
Although profitability still lags that at most other sector banks, this is in part a reflection of the fact that AAIB operates a USD-based balance sheet and P/L; banks that have balance sheets and P/Ls denominated in EGP tend to benefit (in the short term at least) from the impact of a declining EGP and (very) high EGP interest rates. Although such movements have had some benefits for AAIB (and the other USD-denominated bank (Arab International Bank), the effects have been much smaller in USD terms.
AAIB has a good franchise within the Egyptian banking sector, ranking fifth by total assets. However, the Bank’s strong corporate and investment banking franchises tend to increase concentration risks in both loans and deposits. Core banking activities are complemented by AAIB’s active presence in more niche segments such as margin lending, credit card merchant acquisition, fund and wealth management, as well as equity brokerage and custody services. The Bank continues to have a good distribution capacity and an established retail customer deposit franchise.
Looking ahead, last year saw strong asset growth (despite AAIB having a USD-denominated balance sheet) and even stronger growth in customer deposits. Although much of this increased liquidity was deployed into interbank placements, the very low loan-to-deposit ratio at year end means that there is ample scope to reverse the negative growth in gross loans over the last two years. It should be noted that these negative growth rates for net loans on a USD-denominated balance sheet are in reality the translation effect of the pronounced fall in the value of the EGP in USD terms. AAIB is well placed to grow its loan book as the lending environment improves – something that now seems to be possible in H2 24 and into 2025.
Rating Outlook
The Stable Outlook for AAIB’s LT FCR and BSR – which are both already at the sovereign level − indicates that the ratings are unlikely to be altered over the next 12 months.
Rating Dynamics: Upside Scenario
The most likely upside scenario would be a revision of the Outlook to Positive, following a similar upward adjustment to the sovereign ratings outlook. While not our current base case scenario, this is nonetheless seen as being a possibility in the specified time frame.
Rating Dynamics: Downside Scenario
The most likely downside scenario would be a lowering of the Outlook to Negative. Given the generally sound financial metrics, such a downward action would probably require a similar action on the sovereign ratings outlook.
Contact
Primary Analyst: Rory Keelan, Senior Credit Analyst; E-mail: ...
Secondary Analyst and Committee Chairperson: Morris Helal, Senior Credit Analyst
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