Dubai: Standard & Poor’s (S&P) Ratings Services yesterday said it had revised its outlook on Al Baraka Banking Group to negative from stable. At the same time, the ‘BB+’ long-term and ‘B’ short-term counterparty credit ratings were affirmed.
“The outlook revision reflects our view that the group’s financial profile could be negatively affected by the less-supportive operating environment in some of its key markets (specifically Turkey). As a result, we might see deterioration in the bank’s capitalisation level and its asset quality indicators over the next 12 months,” it said.
“The starting point for assigning our ratings on Al Baraka is its ‘bb’ anchor, which is based on our view of economic risks in the countries in which it operates. The ‘bb’ anchor for Al Baraka is based on our industry risk score of ‘6’ for Bahrain (on a scale of ‘1’ to ‘10’, ‘1’ being the lowest risk), where it is incorporated and supervised, despite the very limited activities carried out in this country. We use a blended economic risk score of ‘7’, using the weighted average of economic risk scores of countries where Al Baraka operates by looking at the geographic breakdown of the group’s financing book as of year-end 2015.
“We view Al Baraka’s business position as strong, reflecting the group’s superior geographic diversification in earnings compared with peers, and the competitive benefits it derives from its status as an Islamic bank,” the S&P said.
“Our assessment of Al Baraka’s capital and earnings is moderate, based on our anticipation that our risk-adjusted capital (RAC) ratio before adjustments will remain barely above five per cent in the next 12 months, absent any capital-strengthening measures. In our view, Al Baraka’s RAC ratio might slide below 5pc in case of further deterioration in the level of economic risks in Turkey.
“We consider Al Baraka’s risk position to be adequate, reflecting high granularity in its financing book and good asset quality indicators, despite operations in risky countries,” it said.
“We view funding as average and liquidity as adequate. As a wholesale bank licensed in Bahrain since 2002, Al Baraka has no access to its central bank’s funding mechanisms, but all of Al Baraka’s subsidiaries are self-funded and would have access to funding mechanisms provided by their domestic authorities if needed. Al Baraka 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 Al Baraka’s unsupported group credit profile (UGCP) at ‘bb+’. The final rating on Al Baraka reflects the UGCP and does not incorporate any uplift for potential extraordinary support.
“The negative outlook reflects our view that Al Baraka’s capitalisation and asset quality might come under pressure in the next 12 months, due to the less-supportive operating environment of some of its major subsidiaries, particularly Turkey,” the ratings agency said.
“We could lower the long-term rating if the group’s capitalisation declines, with our RAC ratio dropping below 5pc, in case of major drift in quality indicators, or in case of erosion of its current liquidity buffer. Any appearance of double leverage at the group level would likely also prompt a negative rating action on Al Baraka, as debt repayments would become highly reliant on the upstreaming of dividends from a limited number of subsidiaries, whose creditworthiness we assess as lower than the UGCP.
“We could revise the outlook to stable if we see a strengthening in the group’s capitalisation while its asset quality indicators remain broadly stable,” it said.
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