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Standard & Poor’s Ratings Services has revised its outlook on Bahrain-incorporated Arab Banking Corp BSC (ABC) to stable from positive. At the same time, the ‘BBB-/A-3’ counterparty credit ratings on ABC were affirmed.

“The outlook revision reflects ABC’s failure to sustain the momentum of improvement in its profitability,” says Standard & Poor’s credit analyst Emmanuel Volland. ABC is substantially increasing its loan-loss provisions, driven by the difficult economic environment in the

  • US, the Middle East, and Latin America. With weak operating conditions likely to persist into 2003, Standard & Poor’s does not expect the group’s performance to improve in the near term.

 

The ratings on ABC reflect the bank’s strong Arab business franchise, improving risk management systems, and stable capitalisation. The ratings are also bolstered by the presence of supportive shareholders, which include the Kuwait Investment Authority, the Central Bank of Libya, and the Abu Dhabi Investment Authority. Although the ratings are somewhat constrained by the parent-level reliance on short-term funding, as well as the group’s low performance ratios, liquidity management has been enhanced and the parent company’s liquidity reflects improving trends. Contingency plans have been recently tested as the threat of war against Iraq looms.

ABC is one of the largest banks in the Arab world, with consolidated assets of US$28.8bn at September 30, 2002. Incorporated in the Kingdom of Bahrain (local currency A/Stable/A-1, foreign currency A-/Stable/A-2), ABC operates under an offshore banking licence. The bank has two important international subsidiaries: Spain-based Banco Atlantico SA (BBB/Positive/A-2) and Hong Kong-based International Bank of Asia (IBA; BBB/Stable/A-3). ABC has recently announced its intention to divest from IBA.

“ABC’s focus on the Arab world fits well with the bank’s core expertise. However, the bank still needs to demonstrate that this strategy will allow it to boost its low profitability,” adds Volland.

Regional economic pressure and the need to set aside provisions to cover risks will continue to depress reported profits in the foreseeable future. Failure to achieve sustained performance in the medium term will result in additional pressure on the ratings. Conversely, the ratings could be raised as a result of a successful expansion of the group’s Arab franchise, enhanced performance, and further improvements in the group’s liquidity and risk profile.