Arab Banking Corporation, the Bahraini bank that is part-owned by Libya's central bank, is treading a difficult path. It has been mired by its link with the beleaguered North African nation and the international asset freezes associated with its ruler, Muammar Qaddafi.
But in a further blow, the ratings agency Moody's downgraded its rating on the lender by a notch to "speculative grade".
The deposit ratings at Arab Banking Corporation now fall under "Ba1/not prime", from "Baa3/Prime minus 3", essentially judging the lender to have "substantial credit risk". The main reason for the downgrading is the bank's continued reliance on Libyan deposits, and the potential constraints on its franchise - its 59 per cent majority shareholder, the Libyan central bank, remains subject to sanctions imposed by the UN, the US and the EU against the Libyan regime.
Arab Banking held US$406.3 million of Libya's deposits as of June 30 last year, according to a document obtained by the campaigning agency Global Witness.
"Although Libyan deposits are currently frozen and cannot be withdrawn, there is uncertainty about what will happen to these deposits once the situation in Libya is resolved," said George Chrysaphinis, a Moody's vice president and lead analyst for Bahraini banks. Despite Arab Banking obtaining an exemption that allows it to continue operating while barring the bank from engaging in any transactions with the Libyan government, the speculative environment hanging over the stock has discouraged investors.
Another ratings agency Fitch also downgraded the bank to "junk" status in March. That was following an initial downgrading by the agency prompted by the Libyan central bank's move to raise its stake in Arab Banking last December after buying out the Abu Dhabi Investment Authority's holding.
The shares, which trade in US dollars, ended yesterday flat at 46 cents. The stock has shed more than 30 per cent of its value since the beginning of the year.
Arab Banking reported a loss of $880m in 2008 after charges related to structured investment vehicles, but it has recovered and in the next two years posted profits totalling $265m.