Moody’s downgrades Arab Banking Corporation of Bahrain due to Libyan control

Moody's Investors Service has downgraded a number of ratings of Bahrain-based Arab Banking Corporation B.S.C. due to its majority-control by the central bank of Libya.
Moody’s said it lowered the foreign currency deposit ratings to Baa3/Prime-3 from A3/Prime-2 and 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 deposit ratings and BFSR remain on review for possible downgrade.
The rating agency said that the downgrade of the supported deposit rating was driven by the ongoing severe political crisis in Libya, which is the majority owner of ABC, through the Central Bank of Libya's (CBL) 59% stake.
Headquartered in Manama, ABC reported total assets of US$ 28.1 bln as at December 2010.
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).
ABC maintains some credit exposure to Libya, primarily off-balance sheet, and also exhibits considerable funding reliance on Libyan institutions. Moody’s explained that lthough 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 noted the bank's relatively high Tier I capitalization ratio of 19.2% and recent return to profitability.
Solid indications that ABC is able to conduct business as usual or that it has successfully coped with additional stress could lead to the confirmation of current ratings, Moody’s said. By contrast, signs of material deterioration in the bank's liquidity position could lead to a further downward rating action.
Moody's said its review will also consider the extent of support from the bank's minority shareholder, KIA. Its previous rating action on ABC was implemented on 8 December 2010, when the rating agency placed the deposit ratings on review for possible downgrade, following the acquisition of majority control by Libya.