Fitch places Arab Banking Corporation on Rating Watch Negative; downgrades individual to 'C/D'

ABC's dated subordinated debt obligations rated at 'BBB' are also placed on RWN. In addition, ABC's Individual rating is downgraded to 'C/D' from 'C'. ABC's Support rating is affirmed at '2'.

The RWN on ABC's IDRs and Support Rating Floor reflect Fitch's concerns that the level of ongoing willingness by the major shareholders to provide support to the bank in the future, in case of need, may have weakened slightly. These concerns are driven by the damaging effect structured credit market-related losses in Q108 and H207 could have on ABC's franchise, profitability, funding and prospects.

The RWN will be resolved following a review by Fitch of the level of financial support available to ABC from its major founding shareholders. These are the Abu Dhabi Investment Authority (27% of ABC's shares), the main investment arm of the emirate of Abu Dhabi (rated 'AA'/Stable), the Kuwait Investment Authority (29%), the main investment arm of the state of Kuwait (rated 'AA-'(AA minus)/ Stable), and the Central Bank of Libya (28%).

The Support rating reflects the high probability that ABC would receive financial support if required. This was demonstrated by the timely April 2008 announcement of a $1bn rights issue to which ABC's major shareholders will be the main subscribers. The bank received $500m capital in advance from this rights issue in Q108 and this helped to maintain capitalisation at adequate levels. ABC's Basel II capital adequacy ratio was 12.9% at end-Q108. Nevertheless, Fitch considers there to be some uncertainty over the level of further financial support available to ABC.

The downgrade of the Individual rating reflects the considerable impairment charges ABC suffered in Q108 and H207, totalling $902m, which mainly relate to the bank's investments in structured investment vehicles (SIV) and collateralised debt obligations (CDO); these charges contributed to ABC reporting an operating loss of $563m in Q108. This was in addition to $421m cumulative fair-value losses from its investment portfolio and smaller, but significant, trading losses from hedge fund investments in the same period.

Impairment charges for investment securities taken in Q108 and H207 covered a high 87% of the bank's SIV and CDO investments, which include exposure to US sub-prime residential mortgage-backed securities. Market conditions for these instruments are currently extremely adverse but any further necessary impairment charges for investment securities are not likely to be significant, given the relatively high level of reserves coverage of impaired assets.

Nevertheless, total impairment charges of $902m in Q108 and H207 were equivalent to a very high 42% of end-H107 equity of $2.2bn, and fair-value losses of $421m in Q108 and H207 were equivalent to a considerable 19% of end-H107 equity.

Established in 1980, ABC's main activities are trade and project finance and the provision of treasury products; these businesses performed well in 2007, reflected in healthy growth of net interest and fee income of 24% to $434m. ABC operates in London and other major financial centres, as well as through a 56%-owned Brazilian subsidiary and small domestic operations in Algeria, Egypt, Iraq, Jordan, and Tunisia.