Overview -- We have reviewed the wider implications for Jordan-based Arab Bank group' entities of risks that we consider to be high in several Middle East and North Africa (MENA) countries where the group is present. Risks for the Arab Bank group's financial profile are increasing, in our opinion, owing to continuing political uncertainties and social tensions. -- We have revised our assessment of the group's risk position to moderate and lowered our group credit profile assessment to 'bbb' from 'bbb+'. -- Consequently, we are lowering our long-term ratings on Europe Arab Bank PLC and Arab Bank Australia Ltd., the foreign subsidiaries of the group's main operating entity, Arab Bank PLCARBK.AM , to 'BBB' from 'BBB+' and affirming the 'A-2' short-term ratings. The outlooks are negative. -- We are also lowering our ratings on Arab Bank PLC's branches in Bahrain, Dubai, Qatar, and Singapore to 'BB/B' to equalize them with the ratings on the parent. The outlooks are negative. -- We are affirming our 'BB/B' long- and short-term ratings on Arab Bank PLC, with a negative outlook. -- The negative outlooks on Arab Bank PLC and its foreign branches mirror the negative outlook on Jordan. The negative outlook on Arab Bank PLC's foreign subsidiaries takes into account the negative outlook on the parent, as well as the downward pressure on the Arab Bank group's creditworthiness owing to its large exposure to the MENA region. Rating Action On July 3, 2012, Standard & Poor's Ratings Services took the following rating actions on various subsidiaries and foreign branches of Jordan-based Arab Bank group: -- We affirmed our 'BB/B' long- and short-term counterparty credit ratings on the group's main operating entity, Arab Bank PLC. The outlook remains negative. -- We lowered our long-term counterparty credit ratings on subsidiaries Europe Arab Bank PLC and Arab Bank Australia Ltd. to 'BBB' from 'BBB+'. We affirmed our 'A-2' short-term ratings on the two banks. The outlooks are negative. -- We lowered our long- and short-term counterparty credit ratings on foreign branches Arab Bank PLC (Singapore), Arab Bank PLC (Dubai), and Arab Bank PLC (Qatar) to 'BB/B' from 'BBB+/A-2' and Arab Bank PLC (Bahrain) to 'BB/B' from 'BBB/A-3'. The outlooks on these four branches are negative. Rationale The rating actions follow our review of the wider implications for Jordan-based Arab Bank PLC and several related entities (together the Arab Bank group) of the continuing social tensions, political uncertainties, and resulting economic challenges in some of the Middle East and North Africa (MENA) countries where the group operates. As a result of our review, we have revised our assessments of the group's risk position to "moderate" from "adequate" and of its group credit profile (GCP) to 'bbb' from 'bbb+'. We expect the operating environment and the credit conditions in various MENA countries, especially in North Africa, to remain unfavorable for the group's business and financial profiles. We could consequently consider revising our economic risk scores of the respective domestic banking systems, in accordance with our Banking Industry Country Risk Assessment (BICRA) methodology. This would in turn increase the likelihood of a further downward revision of the group credit profile (GCP). Concurrently, the downgrades of the four foreign branches of Arab Bank PLC reflect our opinion of the close correlation between the creditworthiness of the branches and the parent. Owing to their legal status as foreign branches rather than separately established subsidiaries, and their closer management ties with their parent, the distinction between the assets and liabilities of these branches and those of the parent is less than for the group's foreign subsidiaries. The ratings on subsidiaries Europe Arab Bank PLC and Arab Bank Australia Ltd. reflect our 'bbb' GCP for Arab Bank group. The ratings on the group's main operating entity, Jordan-based Arab Bank PLC, and its foreign branches are three notches below the GCP as we cap these ratings at the level of the sovereign ratings on Jordan (BB/Negative/B). In our opinion, the Arab Bank group has shown a good financial and operational resilience since early 2011 against a turbulent backdrop. For instance, it has improved profitability and maintained a moderately stable financial profile over the period. The group, including its sister bank, Arab Bank Suisse (not rated), in Switzerland, continues to maintain a high liquidity buffer. Still, Arab Bank group's sensitivity to sovereign-related risks in the MENA region is increasing since the group has about 45% of its assets in countries rated lower than 'BBB-'. Among these, Jordan and Egypt account for the largest portion. The group's direct exposure to these two countries--in the form of local currency bonds and bills but excluding central bank placements--stood at about $3.2 billion or almost 40% of its total equity on Dec. 31, 2011. Mitigating this to a degree are the short-term maturities of this exposure. The GCP is derived from our 'bb+' anchor for Arab Bank group, and our view of the group's "very strong" business position, "adequate" capital and earnings, "moderate" risk position, "above average" funding, and "strong" liquidity, as our criteria define these terms. Our bank criteria use our Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating (ICR). The 'bb+' anchor for the group is based on our industry risk score of '6' for Jordan (on a scale of 1-10, '1' being the lowest risk and '10' the highest), where its main operating entity is registered and regulated, and a blended economic risk score close to '6'. We derive the latter from the weighted average of economic risk scores of countries where the group operates by looking at the geographical breakdown of its gross funded and unfunded exposures. Therefore, our assessment of the creditworthiness of the group takes into account its exposure to countries that have been facing significant political and economic pressure. At year-end-2011, the group had about 20% of its assets in Jordan and about 25% in countries that we rate below 'BBB-'. Since January 2011, when social uprisings started in various MENA countries, we have taken negative rating actions on various sovereigns, including Jordan, Egypt (B/Watch Neg/B), and Tunisia (BB/Stable/B). Our outlooks on the long-term ratings on many sovereigns in the region, including Jordan, remain negative. Outlook The negative outlooks on Arab Bank PLC and its foreign branches mirror that on Jordan. According to our criteria, we cap our ratings on these entities at the level of the sovereign ratings on Jordan. This reflects Arab Bank PLC's incorporation in Jordan and its large exposure to the sovereign. We consequently expect the ratings on the bank and its branches to remain closely correlated with the sovereign's creditworthiness. Any downgrade of the sovereign would trigger a similar downgrade of Arab Bank PLC and its four foreign branches. A positive rating action on Jordan would trigger the same rating action on Arab Bank PLC and its four foreign branches. However, this would not trigger an upward revision of our GCP for Arab Bank group. The negative outlooks on Europe Arab Bank PLC and Arab Bank Australia Ltd. take into account the following: -- Our negative outlook on the parent entity. A negative rating action on the parent would likely trigger a negative rating action on these two entities. -- The downward pressure on the GCP owing to our negative outlooks on several countri
es where the Arab Bank group operates. Therefore, there is an increased likelihood of deterioration in our economic risk scores in these countries, which could negatively affect the group's anchor, capitalization, and subsequently the GCP. We would lower the GCP and our ratings on these two entities if the following scenarios were to materialize and led us to revise our assessment of the group's business position or risk position: -- A change in risk appetite that would trigger more aggressive growth and significantly alter the group's financial profile. -- Further deterioration in the operating environment in countries where the group operates, especially Jordan. -- A lowering of the anchor, which could be triggered by changes in Arab Bank group's asset mix by country. This could occur, for instance, if the share of countries we consider to be higher risk, notably in North Africa, were to increase significantly. At the same time, we believe that the group will retain its superior geographic diversification in the region and stick to its current strategy, which is more conservative than for most peers. Under our base-case scenario, the group's projected risk-adjusted capital (RAC) ratio before adjustments will likely remain close to 10% over the next two years. An upward revision of the group's GCP appears unlikely within the rating horizon (24 months) as it would require a major improvement in the credit conditions in the group's operating environment, and the group's maintenance of capitalization, funding, and liquidity at current levels. Ratings Score Snapshot Issuer Credit Rating BB/Negative/B SACP bbb Anchor bb+ Business Position Very Strong (+2) Capital and Earnings Adequate (0) Risk Position Moderate (-1) Funding and Liquidity Above average and Strong (+1) Support 0 GRE Support 0 Group Support 0 Sovereign Support 0 Additional Factors -3 Related Criteria And Research -- Banks: Rating Methodology And Assumptions, Nov. 9, 2011 -- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 Ratings List Downgraded; Outlook Action; Ratings Affirmed To From Arab Bank Australia Ltd. Europe Arab Bank PLC Counterparty Credit Rating BBB/Negative/A-2 BBB+/Stable/A-2 Certificate Of Deposit BBB/A-2 BBB+/A-2 Arab Bank PLC (Bahrain) Counterparty Credit Rating BB/Negative/B BBB/Negative/A-3 Certificate Of Deposit BB/B BBB/A-3 Arab Bank PLC (Dubai) Arab Bank PLC (Singapore) Arab Bank PLC (Qatar) Counterparty Credit Rating BB/Negative/B BBB+/Stable/A-2 Certificate Of Deposit BB/B BBB+/A-2 Ratings Affirmed Arab Bank PLC Counterparty Credit Rating BB/Negative/B Certificate Of Deposit BB/B Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal atwww.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site atwww.standardandpoors.com. Use the Ratings search box located in the left column. (New York Ratings Team) ((e-mail: pam.niimi@reuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))
