Wednesday 27, September 2017 by Nabilah Annuar

Arab International Bank’s ratings affirmed with a stable outlook

Capital Intelligence Ratings (CI), the international credit rating agency has affirmed AIB’s Long- and Short-Term Foreign Currency Ratings (FCRs) both at ‘B’ with a stable outlook.

CI Ratings recently upgraded the Bank’s Long-Term FCR to ‘B’ in line with the upgrade of Egypt’s Sovereign Long-Term FCR to ‘B’. The Bank’s FCRs, which are constrained by CI’s sovereign ratings for Egypt ('B'/'B'/'Stable'), denote significant credit risk given that the Bank’s capacity for timely fulfilment of financial obligations is vulnerable to adverse changes in internal or external circumstances.

The Bank’s Financial Strength Rating (FSR) is affirmed at ‘BB’, underpinned by the significant capital increase in 2016 and very sound capital adequacy ratio (CAR), higher liquidity driven by strong customer deposit growth, improvement in operating profitability (although net profit fell due to higher provisions for forex losses) ), and capable management and effective risk management framework. The rating constraints are exposure to sovereign risk, significant concentrations in loans, customer deposits and securities, and the high non-performing loans (NPL) to gross loans ratio. Also constraining the rating is the high utilisation of interbank funding, though this is mitigated by a sound net liquid asset ratio. The Outlook for the FSR remains ‘Stable’. The Support Rating is affirmed at ‘3’, based on the expectation of a high likelihood of shareholder and Central Bank of Egypt (CBE) support in case of need.

Egypt succeeded in meeting the IMF’s preconditions to qualify for much needed financial assistance to support economic reforms and ease pressure on foreign exchange reserves and foreign currency liquidity in the local market. Although the programme should provide some respite for the government by stabilising the country’s external liquidity and alleviating acute foreign currency shortages, CI considers implementation risk to be high given the depth and socially-sensitive nature of many of the planned reforms. The flotation of the Egyptian Pound (EGP) in November 2016 (one of the conditions imposed by the IMF) has increased foreign currency inflows into the Egyptian banking system and ended the parallel market. Egypt has since scrapped the last major control on capital transfers, having put in place strict controls on the movement of foreign currency after the 2011 political uprising in an effort to limit capital flight.

Amid ongoing challenging economic conditions in Egypt, AIB’s loan asset quality weakened in recent years as evidenced by the growth in NPLs and fall in loan-loss reserve coverage. Although the Bank is exposed to high credit risk given the large borrower concentrations, it is worth mentioning that a majority of the top credit exposures is comprised of public and government sector entities. Prolonged difficult economic conditions, however, may produce a further increase in the NPL accretion rate going forward, as well as increased provision charges. In this regard, the Bank’s satisfactory operating profitability is capable of withstanding higher provisioning requirements if necessary.

Liquidity remains sound, and improved markedly in 2016 on the back of substantial customer deposits growth. The launch of EGP operations contributed to the considerable increase seen in customer deposit funding. However, that expansion was driven by a few large deposits which had the effect of increasing funding concentrations. In mitigation, AIB maintained high balance sheet liquidity, with the bulk of EGP liquidity deployed into Egyptian T-bills. Over time the Bank’s continued expansion of the branch network is expected to mobilise additional EGP customer deposits, especially retail funds, and these will underpin diversification of the customer deposit base. Although interbank liabilities remain a significant component of total funding, the aggregate of AIB’s liquid assets plus bank placements exceeded interbank liabilities by a very comfortable margin.

A significant capital increase in H1 2016 after the Board called in $150 million of issued unpaid capital has reinforced AIB’s capital adequacy to a very sound level. The Bank’s risk profile, including the large borrower concentrations, requires an effective risk buffer and solid CAR. Internal capital generation continued to improve moderately thanks to strengthened profitability in recent years and a reduced dividend payout. Total regulatory capital has a very high Tier 1 component. AIB’s proportion of free capital to total capital however is comparatively low, this being a function of the significant level of investment in associates.

Aided by an improving net interest margin in recent years, as well as increased investment in Egyptian government paper, AIB recorded strong growth in net interest income in 2016. However, volatility returned to non-interest income (NII) streams as demonstrated by a fall in fees and commissions and share of profits from associates. Curtailed lending as well as reduced contingents accounts business underpinned the decline in fee and commission income. Notwithstanding the challenges of restoring NII to a more solid footing, CI expects commencement of EGP operations in 2016 to diversify sources of income particularly from retail business over the longer term. AIB’s profitability continued to improve at the operating level, although exceptional foreign currency revaluation losses in 2016 produced a significant drop in net profit. On a positive note, bottom line net profit recovered in H1 2017 versus H1 2016, while operating profit continued to grow strongly.

AIB was established under an international treaty as an Egypt-based offshore banking unit by five Arab sovereigns in 1974. The major shareholders (with interest over 10 per cent) are: Arab Republic of Egypt, Libya Foreign Bank on behalf of the Libyan government, and Abu Dhabi Investment Authority. At an extraordinary shareholders’ meeting in 2012, and following CBE approval, AIB’s charter was amended to permit it to deal in all currencies. Currently, the Bank operates along the lines of a universal bank and its operations are transacted in both foreign currency and Egyptian Pounds. AIB is also subject to CBE banking regulations and supervision, with CBE acting as official lender of last resort. As at end-June 2017, the Bank’s total assets were $4.82 billion and total capital was $972 million.

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