OREANDA-NEWS. Fitch Ratings has affirmed Arab Bank Australia Limited's (ABAL) Long-Term Issuer-Default Rating (IDR) at 'BBB-', Short-Term IDR at 'F3' and Viability Rating at 'bb+'. The Outlook is Negative. Fitch has simultaneously withdrawn ABAL's ratings for commercial reasons. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS

IDRS AND SUPPORT RATING

ABAL's IDRs and Support Rating reflect Fitch's view that it is a core subsidiary of its parent, Arab Bank Plc (Arab Bank, BBB-/Negative). The agency believes there is a high likelihood of support from Arab Bank if needed, due to the potential reputational risk for the wider group if Arab Bank did not support one of its subsidiaries. ABAL and Arab Bank have a close relationship, sharing the same brand name and strategy. The group keeps a liquid balance sheet and is well placed to provide support, especially given ABAL's small size relative to its parent. ABAL made up just 2.1% of the group's total assets at end-2015.

ABAL's Negative Outlook reflects the Negative Outlook on the parent's Long-Term IDR. Details can be found in Arab Bank's rating action commentary Fitch Affirms 3 Jordanian Banks; Revises Jordan Islamic Bank and Bank of Jordan's Outlook, dated 15 March 2016.

VR

ABAL's VR reflects its moderate company profile, improving asset quality and a funding and liquidity profile adequate for its rating level. Its VR also considers the bank's consistently weak operating profitability, which combined with high risk-weighted asset growth, is likely to pressure capitalisation.

The bank's moderate company profile reflects a small Australian banking market franchise, high product and customer concentrations and susceptibility to economic changes and competitive pressure. Fitch does not expect ABAL to improve its franchise due to the oligopolistic position of a small number of large domestic banks, creating significant barriers to entry.

A high level of single name and industry concentration risks in ABAL's credit exposures could make it more susceptible to larger credit losses relative to domestic peers. Fitch expects asset quality to stabilise due to ABAL's new underwriting system, low interest rates and unemployment. Higher asset prices also partly mitigate the increasing pressure on asset quality, resulting from a turning credit cycle and softer global credit outlook. The bank's asset quality has improved, but remains weaker relative to peers.

Fitch says ABAL's operating profitability is unlikely to improve due to intense asset competition in a low-interest rate environment pressuring revenue generation. Cost management also remains weak. ABAL's poor profitability and volatile asset growth is likely to pressure its capital ratios, with the bank's Fitch Core Capital ratio already declining to 14.9% at end-2015, from 16.6% in 2013. However, Fitch expects ABAL's parent to provide capital, if needed.

ABAL's funding and liquidity profile is likely to remain sound for its rating level. Fitch expects the bank's loan book to be fully funded by customer deposits. Single name concentrations within the bank's deposits result from its niche business model and small size. However, Fitch says a liquid balance sheet mitigates some of the risk.