AJMAN BANK
Fitch Ratings has affirmed
Key Rating Drivers
AJB's IDRs are driven by potential 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 although 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 Rating of 'bbb+': AJB's Government Support Rating (GSR) reflects the
Favourable Environment: Fitch expects operating conditions to remain solid for
Small Franchise: AJB's small branch network limits financing distribution capabilities and deposit collection. AJB's business model is concentrated on real estate financing.
High Risk Appetite: High concentration by single name on both sides of the balance sheet and high exposure to the volatile commercial real estate sector (43% of end-2022 gross financing) weigh on AJB's risk profile. Appropriate financing standards based on completed and revenue-generating properties, adequate financing-to-value ratios and frequent revaluations mitigate risks to some extent.
Weak Asset Quality: AJB's asset quality deteriorated significantly in 2022. The Stage 3 financing ratio increased to 17% at end-2022 from 11% at end-2021 due to an increasing stock of Stage 3 financing combined with a sharp contraction of the financing book. AJB's problem financing (Stage 2+3) ratio was very high at 44% at end-2022 (end-2021: 32%), as the bank continues to originate problem financing in the real estate, construction and services sectors. Reserve coverage of Stage 3 financing has significantly weakened, partly due to sizeable write-offs.
Weak Profitability: AJB's profitability continued to improve in 2021 and 2022 but is constrained by tight net financing margins and a high cost/income ratio. The operating profit/risk-weighted assets ratio increased strongly to 1.6% in 2022 (2021: 0.7%), mostly due to much reduced financing impairment charges, but would have been weaker if the bank had strengthened provisioning, which is very weak. Fitch expects AJB's profitability to remain stable in 2023, although higher provisioning requirements could undermine this.
Weak Capitalisation: Capitalisation is undermined by high financing concentrations, asset quality weaknesses and high unreserved Stage 3 financing (72% of common equity Tier 1 (CET1) capital at end-2022). The CET1 ratio and total capital adequacy ratio were 14.4% and 15.6% at end-2022, respectively, providing a moderate buffer to absorb asset quality deteriorations. AJB has a good ability to raise capital and a flexible dividend policy, and Fitch expects this to support the bank's capital ratios over the medium term.
Concentrated Funding; Adequate Liquidity: AJB's small franchise constrains its funding profile. Total deposits made up 94% of non-equity funding at end-2022. The bank is majority-funded by wholesale deposits, with limited current and savings accounts (28%) and retail deposits (27%). This results in high funding costs and deposit concentration. High-quality liquid assets accounted for 15% of total assets and covered 18% of deposits at end-2022.
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. It would likely stem from our view of weaker ability or propensity 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 we do not expect the bank's systemic importance to increase significantly.
A strengthening of the bank's business profile through further business model diversification, a stronger franchise, and lower concentrations could lead to an upgrade of the VR. However, an upgrade of the VR would also require further improvement in asset quality and profitability metrics, allowing for a sustainable strengthening of capital ratios, and in particular a reduction of capital encumbrance by uncovered impaired loans.
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 reasons: business model (negative) and market position (negative).
The earnings and profitability score of 'b+' has been assigned below the 'bb' category implied score, due to the following adjustment reasons: earnings stability (negative).
The capitalization and leverage score of 'b+' has been assigned below the 'bbb' category implied score, due to the following adjustment reasons: reserve coverage and asset valuation (negative) and risk profile and business model (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's 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/esg.
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