AJMAN BANK
Fitch Ratings has affirmed
Fitch has withdrawn AJB's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on
Key Rating Drivers
AJB's IDRs are driven by a high probability of support from the
AJB's VR reflects the bank's small franchise, with a market share of less than 1% of domestic credit, undiversified business model, high risk profile reflected through high concentrations on both sides of the balance sheet, weak albeit improving, asset quality, modest profitability and weak capitalisation. The VR also considers the bank's concentrated but stable funding and adequate liquidity profile.
Government Support: AJB's 'bbb+' GSR reflects the
Small Franchise: AJB's small branch network limits financing distribution capabilities and deposit collection. AJB's business model is undiversified and weighted towards real estate financing.
High Risk Appetite: A balance sheet concentrated by names on both sides and high exposure to the volatile commercial real-estate sector (43% of end-2021 gross financing) weigh on AJB's risk profile. This is somewhat mitigated by appropriate financing standards with a preference for completed and revenue generating properties, adequate financing-to-value ratios and frequent revaluations.
Weak Asset Quality: AJB's Stage 3 financing ratio reduced to 9% at end-1Q22 (end-2021: 11.3%) but remains well above the
Weak Profitability: AJB's profitability continued to improve in 2021 and 1Q22 but is constrained by tight net financing margins and a high cost/income ratio. The operating profit/risk-weighted assets ratio remained modest 0.8% in 1Q22 and 2021 (albeit improved from 0.3% in 2020). Fitch expects AJB's profitability to continue recovering in 2022, supported by easing operating environment pressure, higher fees and commissions as well as moderation of financing impairment charges.
Weak Capitalisation: Capitalisation is weak in light of high financing concentrations, asset quality weaknesses and high unreserved Stage 3 financing (30% of common equity Tier 1 (CET1) capital at end-1Q22). The CET1 ratio and total capital adequacy ratio of 14.4% and 15.6% at end-1Q22, respectively, provide a moderate buffer to absorb asset quality pressures. The bank's ability to raise capital and its flexible dividend policy. Fitch expects this to support AJB's capital ratios over the medium term.
Concentrated Funding; Adequate Liquidity: AJB's funding profile is constrained by its small franchise. The bank is majority-funded by corporate deposits (89% of non-equity funding at end-1Q22), with limited 23% of current accounts and retail deposits. This results in high funding costs and deposit concentration. Net liquid assets accounted for 13% of total assets and covered 15% of customer deposits at end-2021 (end-2020: 9% and 10%, respectively). Positively, AJB's financing to deposits ratio is adequate, at 90% at end-1Q22.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of AJB's Long-Term IDR would require a downgrade of the GSR. The latter would likely stem from a weaker ability of the
Pressure on AJB's VR could result from deterioration in asset quality resulting in a weakening in profitability metrics and core capital ratios.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the IDR would require an upgrade of the bank's GSR and is unlikely in the short to medium term as the bank's systemic importance is not expected to increase significantly.
A strengthening of the bank's business profile through further business model diversification, stronger franchise as well as lower concentrations could lead to an upgrade of the VR. An upgrade of the VR would also require further improvement in asset quality and profitability metrics allowing for a sustainable strengthening of capital ratios.
VR ADJUSTMENTS
The operating environment score of 'bbb' is below the 'aa' category implied score due to the following adjustment reasons: size and structure of economy (negative), financial market development (negative) and regulatory and legal framework (negative).
The business profile score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reason: business model (negative) and market position (negative).
The asset quality score of 'b' has been assigned below the 'bb' category implied score, due to the following adjustment reason: impaired loan formation (negative).
The earnings and profitability score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reason: earnings stability (negative) and revenue diversification (negative).
The capitalization and leverage score of 'b+' has been assigned below the 'bbb' category implied score, due to the following adjustment reason: reserve coverage and asset valuation (negative) and size of capital base (negative).
The funding and liquidity score of 'bb' has been assigned below the 'bbb' category implied score, due to the following adjustment reason: deposit structure (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
Ajman IDRs are linked to the
ESG Considerations
Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure relevance score of '4' (in contrast to a typical ESG relevance score of '3' for comparable conventional banks), which has a negative impact on the bank's credit profile in combination with other factors.
In addition, Islamic banks have an Exposure to Social Impacts score of '3' (in contrast to a typical ESG relevance score of '2' for comparable conventional banks), which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on such banks.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on AJB, either due to their nature or the way in which they are being managed by AJB. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/es
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