Moody's Investors Service has downgraded the foreign currency deposit ratings of Bahrain-based Arab Banking Corporation (ABC) to Baa3/Prime-3 from A3/Prime-2.

At the same time Moody's has lowered the bank's baseline credit assessment (BCA) to Ba1, from Baa3, which situates the bank at the lower end of the D+ bank financial strength rating (BFSR). The Baa3/Prime-3 deposit ratings and D+ BFSR remain on review for possible downgrade.

Ratings rationale

Moody's said that the downgrade of the supported deposit rating was driven by the ongoing severe political crisis in Libya, which is majority owner of ABC, through the Central Bank of Libya's (CBL) 59 per cent stake.

According to Moody's the highly volatile political situation raises material uncertainty regarding the availability of parental support from the Libyan authorities, notwithstanding their previous track record of providing support.

As a result ABC's Baa3 deposit rating now incorporates only one notch of support uplift coming from the bank's minority shareholder the Kuwait Investment Authority (KIA), a statement said.

Moody's added that the decision to lower ABC's BCA to Ba1 from Baa3 reflects the pressures that the bank is likely to face, given its association with its majority shareholder. ABC maintains some credit exposure to Libya, primarily off-balance sheet, and also exhibits considerable funding reliance on Libyan institutions.

Although there is currently no indication that these sources of funds are at risk of withdrawal and although the bank maintains significant reserves of liquid assets to cope with other potential liquidity demands, the anticipated challenges are better reflected in a Ba1 BCA.

Conversely Moody's notes the bank's relatively high Tier I capitalization ratio of 19.2% and recent return to profitability.

In keeping standalone and supported ratings on review for possible downgrade, Moody's acknowledges the uncertainty surrounding potential developments in Libya.

During the review period Moody's will monitor such developments and also assess to what extent ABC might be affected by them or otherwise prove to be resilient.

Solid indications that ABC's is able to conduct business as usual or that it has successfully coped with additional stress could lead to the confirmation of current ratings, the statement said.

Moody's review will also consider the extent of support from the bank's minority shareholder KIA, it added. – TradeArabia News Service