INTERNATIONAL. Standard & Poor's Ratings Services today said it 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.
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).
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 countries 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.