Investing.com -- Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) and the Viability Rating (VR) of Arab Banking Corporation B.S.C. (ABC) to ’BBB-’ from ’BB+’ on May 28, 2025. The outlook for the bank remains stable.
The upgrade reflects ABC’s improved operating environment, increased exposure to low-risk markets, and consistent financial performance. ABC’s ratings are driven by its standalone strength, diverse geographical presence, well-managed market risks, stable asset quality, and sufficient capitalization.
ABC’s ratings are not capped by Bahrain’s ’BB+’ Country Ceiling or the Bahraini sovereign rating of ’B+’ as Fitch believes ABC would maintain its ability to service its obligations even in a sovereign default scenario. This is due to ABC’s large US dollar liquid assets outside of Bahrain that could be used to repay creditors outside of the country in a sovereign crisis.
As an offshore Bahraini bank, ABC’s exposure to international markets and particularly to low-risk markets has increased. Operating conditions in the bank’s main regions, including the Gulf Cooperation Council countries (GCC), other Arab countries, and Brazil, have also strengthened.
ABC’s risk management is prudent, focusing on high-quality borrowers and short-term lending. The bank’s loan quality has been stable, with Stage 3 loans at 3.3% at the end of the first quarter of 2025 and limited write-offs in 2024-1Q25. Stage 2 loans declined to 3.1% at end-1Q25 from 4.1% at the end of 2023.
ABC’s profitability improved moderately in 2023-2024 due to stronger fee income, high interest rates, and strengthened economic activities in its core markets. However, profitability remains moderate due to high operating expenses and intense competition. The bank’s operating profit was 1.5% of risk-weighted assets (RWAs) in 2024-1Q25 (2023:1.2%).
ABC’s capital ratios remain supported by reasonable internal capital generation. The common equity Tier 1 (CET1) ratio was 13.2% at the end of the first quarter of 2025, well above the regulatory minimum of 9%. The bank’s currency translation losses of $414 million in 2024 did not have a material impact on its capitalization as these were offset by a 6% decline in RWAs.
Wholesale funding results in high deposit concentrations for ABC. However, large deposits come from shareholders, governments, and government-related entities, which Fitch expects to be stable. ABC also holds a large stock of liquid assets.
Factors that could lead to a downgrade of ABC’s IDRs include a deterioration in the bank’s operating environment or an increase in its presence in volatile markets. A downgrade could also result from asset quality pressures or increased market risks leading to weaker performance and capital erosion. The upside for the VR is limited and would require a further significant decrease in the bank’s exposure to weaker markets.
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