Standard & Poor's lowered the local currency long-term rating on Jordan to 'BBB-' from 'BBB' on March 12, 2010.
We are downgrading the long-term rating on Jordan-based Arab Bank PLC to 'BBB-' from 'BBB' and affirming the 'A-3' short-term rating.
We are affirming the 'A-/A-2' ratings on all of the other operating entities of Arab Bank Group: Europe Arab Bank PLC; Arab Bank Australia Ltd.; and Arab Bank PLC branches in Bahrain, Dubai, Qatar, and Singapore.
The stable outlook on Arab Bank PLC mirrors that on the sovereign ratings because we consider that it is subject to sovereign risk due to its incorporation and operations in Jordan.
PARIS (Standard & Poor's) March 15, 2010--Standard & Poor's Ratings Services said today that it lowered the long-term counterparty credit rating on Arab Bank PLC (AB PLC) to 'BBB-' from 'BBB'. At the same time, we affirmed the 'A-3' short-term rating on the bank. The outlook is stable.
We also affirmed the 'A-/A-2' ratings on the other operating entities of Arab Bank Group (not rated). The outlook is stable for all of these entities.
The rating action on AB PLC follows the downgrade of the local currency sovereign ratings of the Hashemite Kingdom of Jordan (foreign currency BB/Stable/B; local currency BBB-/Stable/A-3), reflecting its decreased medium-term fiscal flexibility. Primarily because of the global economic slowdown and decrease in grants, the country's fiscal deficit increased greatly in 2009 (see "Hashemite Kingdom of Jordan Long-Term LC Rating Lowered To 'BBB-'; Long-Term FC Rating Affirmed At 'BB'; Outlook Stable" published March 12, 2010). We believe that despite planned fiscal restraint in 2010, the Kingdom's net borrowing requirements have structurally increased as a result of lower grant revenues and increasing--mostly inflexible--expenditures.
The ratings on AB PLC in our view benefit from the strengths of the Arab Bank Group but also reflect its incorporation and operations in Jordan where the bank is subject to sovereign risk. Consequently, the ratings on AB PLC are constrained by our local currency rating on Jordan. Arab Bank Group comprises the main entity, AB PLC, its subsidiaries and affiliates, and sister company Arab Bank Switzerland.
Standard & Poor's also affirmed the 'A-/A-2' ratings on several operating entities of the Arab Bank Group: Europe Arab Bank PLC; Arab Bank Australia Ltd.; and Arab Bank PLC branches in Bahrain, Dubai, Qatar, and Singapore. These ratings continue to reflect the group's superior geographic diversification, robust capitalization, strong liquidity, and good asset quality. Offsetting these factors is continued pressure on the group's profitability, which is due to higher provisioning needs, exposure to challenging operating environments in high-risk countries, increasing contractual maturity mismatches, and potential legal risks.
The stable outlook on AB PLC mirrors that on the sovereign ratings because we consider that AB PLC is subject to sovereign risk due to its incorporation and operations in Jordan. The ratings on AB PLC will therefore continue to follow closely those on Jordan.
The stable outlook on the ratings on the other operating entities of the group reflects our expectation that Arab Bank Group will remain the Middle East's leading financial institution in terms of diversification and that the group's strategy will remain conservative and well executed. We also expect liquidity to remain strong.
The ratings on the group would come under downward pressure if asset quality and profitability deteriorate more than we currently expect; if core income generation capacity materially weakens; if international expansion is more aggressive than we expect and weakens capitalization; or if legal or reputational risks materialize.
On the other hand, we could consider a positive rating action if the group is able to maintain its strong financial profile, asset quality, and capitalization, while at the same time sustainably improving profitability, enhancing its funding profile, and clearing itself of outstanding legal risk.
RELATED CRITERIA AND RESEARCH
Hashemite Kingdom of Jordan Long-Term LC Rating Lowered To 'BBB-'; Long-Term FC Rating Affirmed At 'BB'; Outlook Stable, March 12, 2010
FI Criteria: Bank Rating Analysis Methodology Profile, March 18, 2004
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