Al Baraka Banking Group B.S.C. #BB+/B# Ratings Outlook Remains Negative

Stocks and Financial Services Press Releases Tuesday April 18, 2017 17:55
DUBAI--18 Apr--S&P Global Ratings
DUBAI (S&P Global Ratings) April 18, 2017--S&P Global Ratings said today that it had affirmed its 'BB+/B' counterparty credit ratings on Al Baraka Banking Group B.S.C. The outlook remains negative.

The affirmation reflects our view that the planned Tier 1 sukuk issuance by the bank will improve its capitalization. We have assigned intermediate equity content to this instrument, based on the draft legal documentation of this instrument.

Should the final legal documentation differ from the draft documentation, we may revise our assessment of the equity content and the rating on ABG will come under further pressure.

The starting point for assigning our rating on ABG is the group's 'bb' anchor, which we derive based on our view of economic risks in the countries in which it operates. We view ABG's business position as strong, reflecting the group's superior geographic diversification of earnings compared with peers', and the competitive benefits it derives from its status as an Islamic bank.

Our assessment of ABG's capital and earnings is moderate, based on our anticipation that our risk-adjusted capital ratio before adjustments will remain above 5% in the next 12 months, factoring in the expected issuance of Tier 1 sukuk by the bank in the near future.

We consider ABG's risk position to be adequate, reflecting high granularity in the financing book and asset quality indicators that compare adequately with peers', although we have observed some deterioration over the past three years. We expect this deterioration to continue in the next 12 months, owing to the still challenging operating conditions in Turkey, where the bank has around 45% of its financing portfolio.

We view the group's funding as average and liquidity as adequate.

As a wholesale bank licensed in Bahrain, ABG has no access to the central bank's funding mechanisms, but all of the group's subsidiaries are self-funded and would have access to funding mechanisms provided by their domestic authorities if needed.

ABG holds what we regard as a sound portion of its assets in cash and bank placements, but we understand that these liquid assets might not be fungible across the subsidiaries in times of stress. We therefore assess ABG's unsupported group credit profile (UGCP) at 'bb+'. The long-term rating on the group reflects the UGCP and does not incorporate any uplift for potential extraordinary support. The outlook on ABG is negative.

Our rating factors in the expected issuance of Tier 1 sukuk, which we expect to take place in the near future. If we see a diversion from our expectations, we could lower the long-term rating on ABG.

The negative outlook reflects our view that ABG's asset quality might come under pressure in the next 12 months, due to less-supportive operating environments of some of the group's major subsidiaries, particularly in Turkey.

We could lower the long-term rating if we see a significant deterioration in the group's asset quality indicators, that is, the ratio of nonperforming loans (NPLs) increasing to 7% or above and coverage of NPLs by specific provisions dropping below 50% from the current 58%.

We could also lower our rating on ABG if we see a major erosion of its liquidity buffer.
We could revise the outlook to stable if we see a stabilization in ABG's asset quality indicators over the next 12 months, along with credit risk in Turkey receding.

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