Moody's Investors Service has today downgraded the local-currency (LC) deposit ratings of Arab Bank plc to Baa1 from A3, and of Cairo Amman Bank to Ba2 from Ba1. Concurrently, Moody's has placed the ratings of these two banks together with the ratings of Housing Bank for Trade and Finance on review for possible downgrade, Global Arab Network reports according to a press statement.

Today's downgrade of the LC deposit ratings are prompted by Moody's decision on 8 February to lower the sovereign LC rating of Jordan by two notches to Ba2 (negative outlook) from Baa3 (stable outlook) as well as the country ceiling for LC deposits to Baa1 from A3. The review for possible downgrade for all three banks reflects concerns that the current turmoil in the region, following events in Egypt and Tunisia, could also potentially have a negative impact on economic activity in Jordan.

Under Moody's methodology, a government's credit strength serves as a key input in assigning the country's systemic support indicator (SSI). This measures a country's capacity to support its banking system which, in turn, can provide rating uplift to the deposit and debt ratings of a bank. Following the sovereign downgrade, Moody's lowered Jordan's SSI to Ba1 from Baa2. The repositioning of the SSI, which is still one notch above the revised government rating (Ba2), had a direct impact on the LC deposit rating of Cairo Amman Bank due to the two-notches of rating uplift it previously received from the SSI. The downgrade of Arab Bank's LC deposit rating to Baa1 from A3 reflects the lowering of the country's LC deposit ceiling to Baa1, rather than the repositioning of the country's SSI.

"The three rated Jordanian banks' standalone bank financial strength ratings (BFSRs) and LC deposit ratings have been placed on review for possible downgrade to assess the potential impact on the banks' finances from the recent rise in political tensions in Jordan following the turmoil in the region," explains Nondas Nicolaides, a Moody's Vice President and Senior Analyst. "Moody's is concerned that there is a heightened risk of possible deterioration in Jordan's economic conditions due to contagion risk from the current political events. This could negatively impact foreign direct investment flows into Jordan and disrupt economic activity, weakening the performance of the main economic sectors such as tourism, exports and real-estate/construction projects," he adds.

Moody's notes that the review will also assess the banks' exposure to Jordanian sovereign risk, as well as to other regional sovereigns affected by the current political tensions. The downgrade of the sovereign ratings for Jordan, Egypt and Tunisia means that any significant exposure through the corresponding government securities relative to the banks' equity base, would exert pressure on their overall credit standing.

With reference to Arab Bank, whose BFSR is downgraded to C (now mapping to a baseline credit assessment (BCA) of A3) from C+, Moody's says that notwithstanding the bank's relatively strong financial fundamentals, its intrinsic financial health has weakened as a result of the potential impact of political instability in the Middle East and North Africa (MENA) region and on the economic conditions within that region.

Arab Bank's core business franchise is within the MENA and the Gulf region and as a result, is also highly exposed to sizeable LC government securities portfolio that are rated in the non-investment grade relative to its Tier 1 capital. In addition, Arab Bank has shown somewhat weakening financial fundamentals over the last two years, mainly due to increased non-performing loans (NPLs) and lower profitability metrics, suggesting downward pressure on its BFSR. However, the bank continues to be strongly capitalised and highly liquid with a robust deposit franchise both domestically and in the region.

BANK RATINGS AFFECTED BY TODAY'S RATING ACTIONS

- Arab Bank plc: The bank's BFSR has been downgraded to C from C+ and its LC deposit ratings downgraded to Baa1/P-2 from A3/P-2 due to the downgrade of the respective sovereign ceiling. Its foreign-currency (FC) deposit ratings remain at Ba3/NP, constrained by the respective sovereign ceiling. All ratings have been placed on review for possible downgrade,  except the long-term FC deposit rating of Ba3, which has a negative outlook in line with the sovereign ceiling outlook.

- Arab Bank plc (Dubai Branch): The branch's FC deposit ratings have been downgraded to Baa1/P-2 from A3/P-2, in line with the parent bank's LC deposit ratings and were placed on review for possible downgrade.

- Housing Bank for Trade and Finance: The bank's LC deposit ratings of Baa1/P-2 and its BFSR of C- (mapping to a BCA of Baa2) have been placed on review for possible downgrade. The bank's FC deposit ratings of Ba3/NP remain unchanged and have a negative outlook in line with the sovereign ceiling outlook. The LC deposit ratings benefit from one notch rating uplift from the bank's BCA due to imputed support from its supportive shareholder Qatar National Bank (BFSR of C- mapping to a BCA of Baa1) that has a 34.4% stake in the bank.

- Cairo Amman Bank: The bank's LC deposit ratings have been downgraded to Ba2/NP from Ba1/NP and placed on review for possible downgrade, together with its BFSR of D- (mapping to a BCA of Ba3). The bank's FC deposit ratings of Ba3/NP remain unchanged and have a negative outlook in line with the sovereign ceiling outlook.

PREVIOUS RATING ACTIONS & PRINCIPAL METHODOLOGIES

Moody's previous rating actions on the three rated Jordanian banks were implemented as follows:

- The last rating action on Arab Bank was implemented on December 4, 2006 when LC deposit ratings of A3/P-2 were assigned.

- The last rating action on Housing Bank for Trade and Finance was implemented on December 07, 2009 when the bank's long-term LC deposit rating was downgraded to Baa1 from A3

- The last rating action on Cairo Amman Bank was implemented on December 07, 2009 when a positive outlook was assigned to the bank's BFSR

The principal methodologies used in these ratings were "Bank Financial Strength Ratings: Global Methodology" published in February 2007 and "Incorporation of Joint-Default Analysis into Moody's Bank Ratings: A Refined Methodology" published in March 2007. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Headquartered in Amman, Arab Bank Group had total assets of JOD36.5 billion (US$51.1 billion) as of end-December 2010. Headquartered in Amman, Housing Bank for Trade and Finance had total assets of JOD6 billion (US$8.4 billion) as of end-September 2010. Headquartered in Amman, Cairo Amman Bank had total assets of JOD1.8 billion (US$2.5 billion) as of end-September 2010.

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