Fitch affirms Arab Banking Corp at 'BBB+', removes RWN, downgrades individual rating to 'D'

The agency has simultaneously removed the Long-term IDR, Short-term IDR and Support Rating Floor from Rating Watch Negative (RWN). The Outlook for the Long-term IDR is now Stable. Fitch has also downgraded ABC's Individual Rating to 'D' from 'C/D' and affirmed ABC's dated subordinated debt obligations at 'BBB'.

The removal of the RWN on ABC's IDRs and Support Rating Floor rating reflects Fitch's view that the level of support available to ABC from its major shareholders remains unchanged. The RWN had reflected Fitch's prior concerns that the willingness of ABC's major shareholders to provide further support to the bank, in case of need, might have weakened following the $1.1bn rights issue completed in June 2008.

However, the agency has since conducted a further review of the support available to ABC from its major founding shareholders, who have confirmed their continued commitment. The Support rating reflects the high probability of support from its major shareholders, namely the Abu Dhabi Investment Authority (27.6% of ABC's shares), the main investment arm of the emirate of Abu Dhabi ('AA'/Outlook Stable), the Kuwait Investment Authority (29.7%), the main investment arm of the state of Kuwait ('AA'/Outlook Stable), and the Central Bank of Libya (29.5%).

The downgrade of ABC's Individual rating reflects Fitch's concerns about ABC's future prospects in an increasingly difficult operating environment. Fitch believes that it will be much more challenging to achieve successful growth and improve returns in the bank's core wholesale banking operations, with a likely reduction in project and structured finance opportunities and increasing competition from major international banks.

In Q308, ABC announced plans to expand its 'universal banking' strategy focused on the Middle East and North Africa (MENA) region. Fitch believes the successful expansion of its MENA retail banking franchise would strengthen its profitability and funding profile. However, it will be difficult for ABC to achieve this, competing against established domestic and pan-Arab banking groups, when it does not have a significant franchise and there are limited opportunities for sound acquisitions.

In 9M08 and 2007, ABC suffered significant cumulative impairment charges ($1.3bn) mainly for SIVs and CDOs with US sub-prime RMBS exposure, and because of its exposure to Lehman Brothers and Washington Mutual (in Q308).

This resulted in ABC reporting a net loss in 9M08 of $815m. ABC also experienced large cumulative unrealised losses from its investment portfolio in 9M08 and 2007 ($561m). Further write-downs for investments are possible, but, as the SIV and CDO exposures are fully reserved, there is limited downside. ABC's cost efficiency is adequate, but margins are weak, reflecting its focus on large corporates and syndications.

Asset quality in the loan book is, however, satisfactory, with impaired loans 1.1% of gross loans at end-9M08; rapid loan growth (9M08: 7%, 2007: 43%) has slowed. ABC is reliant on wholesale funding, where market conditions have deteriorated. Deposits are increasingly from Arab governments and public sector entities (end-9M08: $9.5bn) and both customer deposits and interbank deposits are highly concentrated. Liquidity has tightened due to market conditions affecting both wholesale funding and the liquidity of the bank's investment portfolio but it is supported by the historic stability of its institutional deposit base and a Q207 $1bn syndicated loan. ABC's Fitch eligible capital ratio was 12.6% and the total regulatory capital ratio 15.6% at end-9M08.

Established in 1980, ABC is a wholesale bank operating internationally, and active in trade, project and structured finance, and treasury operations. It has a major Brazilian subsidiary and small retail and SME operations in Algeria, Egypt, Jordan and Tunisia.