(MENAFN Press) 18 September 2012
Arab International Bank's Ratings and 'Negative' Outlook Affirmed
Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Arab International Bank (AIB)'s Long and Short-Term Foreign Currency (FCR) Ratings at 'BB' and 'B', respectively. These ratings are set at CI's sovereign ratings for Egypt. The Support level is also maintained at '3', based on the expectation that there is a high likelihood of shareholder support in case of need. The Bank's Financial Strength Rating (FSR) was affirmed at 'BBB-', based on its improving capital adequacy, satisfactory asset quality and good liquidity, despite difficult operating conditions, low profitability and concentration risks. As is the case with other Egyptian banks, the Outlook for the ratings remains 'Negative', reflecting the Outlook for CI's Sovereign Rating for Egypt. A downgrade of Egypt's sovereign ratings would immediately follow with a lowering of AIB's ratings.
In the past, Arab International Bank (AIB) had tended to benefit from economic crises due to its special charter and its minimal exposure to the Egyptian economy. Although the Bank currently fully maintains its offshore status, in the current economic and political crisis, customer deposits have continued to decline. To a large extent, this has been due to heightened competition as customers opted for a higher rate of return in Egyptian pounds at other banks. Nonetheless, as lending was also curtailed in 2011, AIB's liquidity remains good and is mainly placed with international banks or invested in marketable securities abroad.
Given that AIB had increased loan exposure to Egypt in the prior year, it is currently more dependent on the Egyptian economy for its source of income than was the case previously. That said, asset quality remains relatively stable with more than full coverage for non-performing loans (NPLs) underscoring effective risk management. However, prolonged difficult economic conditions are likely to lead to higher NPLs and provision charges over the near term. Both credit as well as funding risks are pronounced in the current environment, since as a wholesale bank AIB is exposed to concentration on both sides of the balance sheet.
The Bank's balance sheet remains well capitalized (following a substantial capital injection from core shareholders in 2009), with the reduction in risk weighed assets raising the capital adequacy ratio (CAR) to a good level. Although AIB has continued to make good progress at increasing net interest income, aided by an improving interest differential, its profitability remains low because the Bank is currently precluded from operating in high margin local currency business. Returns from the Bank's investments in associates continue to be modest and prospects of capital appreciation uncertain in the current environment.
AIB was established under international treaty by five Arab sovereigns in 1974 as an Egypt-based offshore banking unit. The major shareholders (>10%) are: Arab Republic of Egypt, Libya and Abu Dhabi Investment Authority. AIB presently operates along the lines of a wholesale bank and its operations are transacted exclusively in foreign currency. In a significant recent development, following Central Bank of Egypt (CBE) approval, AIB's charter was amended at an extraordinary shareholders' meeting. Under the amendment, AIB is permitted to operate in all currencies including Egyptian Pounds starting in 2013. Accordingly, AIB will be subject to CBE supervision and regulations but maintain all other rights and privileges under the treaty. In response to these events AIB's board has established a 'Strategy Formulation Committee' to develop the Bank's new business strategy and business model. As at end-March 2012, the Bank's total assets amounted to USD3.3 billion and total capital was USD721mn.
The information sources used to prepare the credit ratings are the rated entity and public information. Capital Intelligence had access to the accounts and other relevant internal documents for the purpose and considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. Capital Intelligence does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in October 1991. The ratings were last updated in June 2011.
The principal methodology used in determining the ratings is Bank Rating Methodology. The methodology and the meaning of each rating category and definition of default, as well as information on the attributes and limitations of CI's ratings, can be found www.ciratings.com.