Fitch affirms Arab Banking Corporation at ‘BB+’, outlook stable

Fitch Ratings has affirmed Arab Banking Corporation’s (ABC) Longterm Issuer Default Rating (IDR) at ‘BB+’, with a Stable Outlook.

ABC’s Long-term IDR is driven by its Viability Rating (VR), and reflects the bank’s strong capitalisation and comfortable liquidity position, while also considering ABC’s concentrated funding profile and its exposure to highly volatile MENA economies (Bahrain, Egypt, Tunisia and Jordan). The Support Rating of ‘3’ is based on expected support from the bank’s main shareholders, the Central Bank of Libya (CBL - 59.4% stake) and the Kuwait Investment Authority (KIA - 29.7%). The CBL’s ability to support ABC is difficult to assess in the absence of a rating on the Libyan sovereign. The state of Kuwait is rated ‘AA’/Stable Outlook. The subordinated debt rating is notched off ABC’s VR.

Net income was mildly weaker in 2012, largely due to a negative FX translation effect on the Brazilian subsidiary’s results. Underlying trends in core earnings generation were broadly positive, with a modest improvement in net interest income and net fees. Fitch believes earnings in 2013 should benefit from continued growth in the loan book and an improved net interest margin (NIM). ABC’s Brazilian subsidiary (Banco ABC Brasil S.A ; ‘BB+’) continues to be a major contributor to the group’s overall profitability (2012: 42% of total operating income).

Impaired loans declined to 3.2% of total gross loans at end-2012 (2011: 3.5%) and the reserve coverage ratio was strong at 137%, boosted by a large stock of collective reserves. Fitch does not expect a material deterioration in asset quality in 2013.