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Fitch affirms Arab Bank PLC at ‘BBB-‘; Outlook Negative

Fitch Ratings has affirmed Jordan-based Arab Bank PLC’s (Arab Bank) Long-term Issuer Default Rating (IDR) at ‘BBB-‘ and Viability Rating (VR) at ‘bbb-‘. The Outlook is Negative. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS – IDRS and VR

Arab Bank’s IDR is driven by its standalone strength as indicated by its VR. The ratings reflect the bank’s geographic diversification, with notable operations (branches, subsidiaries and affiliates) in the Gulf Cooperation Council (GCC), North Africa and Europe. The bank’s operations in the GCC countries and outside the MENA region, and its holding of liquid assets mainly in Europe (bank deposits along with some high-quality investment securities), enable the bank to be rated higher than its peers in Jordan.

The bank’s geographic diversification, solid capitalisation, conservative overall risk appetite, stable funding profile, the structure of its network and affiliates, and its liquidity management policies help mitigate risks to its credit profile associated with its domicile. Arab Bank’s IDRs are linked but not capped by Fitch’s view of Jordanian sovereign risk.

Fitch considers that some of the risks associated with parts of the bank’s operations across the MENA region have lessened slightly, in particular in ‘Arab Spring’ countries. Asset quality is sound and has been stable despite turbulence in the region. Profitability is strengthening mainly because of lower impairment charges. Arab Bank has maintained its conservative lending practices and emphasis on maintaining high levels of liquidity. Nonetheless, the operating environment in Jordan remains tough and given instability in the region, is unlikely to improve materially in the near term. In addition, we take into account the significant underlying risks of operating in weaker MENA countries, (eg, Egypt, Tunisia).

The ruling against Arab Bank in the US in September 2014 – which the bank is planning to appeal – is one more example of banks’ increasing exposure to litigation and other conduct risks. Uncertainty about the level of fines and potential related business restrictions is a significant current risk for banks generally, especially for those that have operations in higher- risk markets. Fitch is not currently factoring into the ratings any potential loss from this litigation, because of uncertainty regarding the final outcome; at this stage it is difficult to assess potential implications for Arab Bank, financial or reputational or otherwise.

RATING SENSITIVITIES – IDRS and VR

The Negative Outlook reflects residual risks to Arab Bank’s credit profile arising from its domicile and the ratings would be downgraded if Fitch’s opinion of Jordan’s creditworthiness weakens.

An adverse change in Fitch’s assessment of the bank’s ability to offset sovereign-related risks (eg banking sector intervention risk or transfer and convertibility risk) or an increase in economic and political risks in the broader MENA region could also result in downward pressure on the bank’s IDRs. In addition, a change in the bank’s allocation of assets leading to an increase in its exposure to weaker, lower-rated, sovereigns relative to equity would also be negative for the ratings.

The bank’s ratings are sensitive to the final outcome of the on-going litigation in the US. Should the final outcome be negative for the bank, and should the financial cost of a potential settlement or penalty have a material negative impact on the bank’s capitalisation or should the litigation negatively affect the franchise and reputation of the bank, the ratings could be downgraded.

Conversely, the Outlook could be revised to Stable if Fitch views that Jordanian sovereign risk has stabilised.

RATING DRIVERS – SUPPORT RATING AND SUPPORT RATING FLOOR

The Support Rating and Support Rating Floor reflect Fitch’s opinion that support for Arab Bank from the Kingdom of Jordan, if required, is possible, but given Arab Bank’s size, cannot be relied upon. The bank has several core shareholders, but it is difficult to assess their willingness and ability to provide support at all times.

RATING SENSITIVITIES – SUPPORT RATING AND SUPPORT RATING FLOOR

As Fitch does not factor in any support from the Jordanian sovereign, the Support Rating and Support Rating Floor are at their lowest levels. Fitch considers these factors are unlikely to change.

The rating actions are as follows:

Arab Bank PLC:

Long-term IDR affirmed at ‘BBB-‘; Outlook Negative

Short-term IDR affirmed at ‘F3’

Viability Rating affirmed at ‘bbb-‘

Support Rating affirmed at ‘5’

Support Rating Floor affirmed at ‘No Floor’