CREDIT ANALYSIS Arab Petroleum Investments Corporation ... Analysis_19_12_2011.pdfShipbuilding and...

CREDIT ANALYSIS

SOVEREIGN & SUPRANATIONAL DECEMBER 19, 2011

Table of Contents:

RATING RATIONALE AND OUTLOOK 1 ORGANIZATIONAL STRUCTURE AND STRATEGY 2 GOVERNANCE AND RISK MANAGEMENT 4 LIQUIDITY 5 CAPITAL ADEQUACY 6 STRENGTH OF MEMBER SUPPORT 8 RATING HISTORY 9 COMPANY ANNUAL STATISTICS 10 MOODY’S RELATED RESEARCH 14

Analyst Contacts:

NEW YORK 1.212.553.1653

Gabriel Torres 1.212.553.3769 Vice President-Senior Credit Officer [email protected]

Bart Oosterveld 1.212.553.7914 Managing Director-Sovereign Risk [email protected]

DIFC 971.4.237.9548

Mathias Angonin Associate Analyst [email protected]

Arab Petroleum Investments Corporation (APICORP) Supranational

Rating Rationale and Outlook

Moody’s maintains foreign currency issuer ratings on the Arab Petroleum Investments Corporation (APICORP) of A1 (for long-term debt) and Prime 1 (for short-term debt). These ratings have a stable outlook.

APICORP is a multilateral development bank (MDB) created and owned by the ten member states of the Organization of Arab Petroleum Exporting Countries (OAPEC) OAPEC aims at developing an integrated petroleum industry amongst Arab countries, and APICORP is its financial arm. The Corporation enjoys de facto preferred creditor status and has never defaulted on any of its obligations, despite periods of regional political turmoil and low oil prices.

The performance of APICORP's assets is comparatively strong, with a weighted average credit asset quality that is equivalent to a Aa rating (according to the Corporation's own calculations). Around 45 percent of the Corporation's loan assets are covered by completion guarantees from project sponsors, most of whom are governments (9 percent of guarantees) or government-owned oil companies (75 percent of guarantees).

APICORP benefits from strong shareholder support, as indicated by four previous capital increases and their pledge to support the organization on a "joint and several" basis (although the wording of this pledge falls short of a full financial guarantee for creditors). The last capital increase, undertaken in May 2011, brought the Corporation’s paid-up capital to US$750 from US$550 million (APICORP initiated its activity in 1977 with US$340 million in paid-up capital).

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SOVEREIGN & SUPRANATIONAL

2 DECEMBER 19, 2011

CREDIT ANALYSIS: ARAB PETROLEUM INVESTMENTS CORPORATION (APICORP)

The weighted average rating of APICORP's shareholders is A3. This is lower than most other higher-rated MDBs, many of which are backed by Aaa-rated governments, and could become even lower due to pressures on Egypt’s credit profile. The highest rated shareholders in APICORP are rated Aa2 (Kuwait, the UAE and Qatar). We recognise that the government of Saudi Arabia (Aa3) has a particularly strong connection given that APICORP is headquartered there.

The main rating constraint is the unbalanced maturity profile of APICORP’s balance sheet. The bulk of the Corporation's liabilities are short-term (maturing in one year or less), whereas the bulk of its assets are long-term (with a maturity greater than one year). The imbalance mainly derives from a funding reliance on short-term deposits.

APICORP's assets are highly concentrated by geography and by sector when compared to those of most other MDBs. Over 70% of APICORP's loans are to entities in Saudi Arabia and Qatar, while around a third of total loans are to petrochemical projects (the rest is composed of gas processing, marine transportation and other energy projects in the Arab world).

Given the unbalanced maturity profile of its balance sheet, capital adequacy is an especially pertinent rating factor in the case of APICORP. APICORP's risk-weighted capital adequacy ratio was approximately 29.2% at the end of 2010, the lowest among MDBs rated by Moody's, except for PTA bank (Ba1), with a capital adequacy ratio of 25.1%. This weakness is partially offset by consistently positive earnings and below-average risk on its asset portfolio. The relative stability of government and corporate deposits represents another mitigating factor.

APICORP’s issued its first bond in October 2010, raising SAR 2 billion (US$533 million) with an embedded option allowing it to call the bond after 3 years. This enabled APICORP to enhance its maturity profile and ability to attract additional deposits.

APICORP has been scarcely impacted by the regional turmoil. Its Bahraini branch has continued to operate throughout the turmoil. Its project and trade finance (PTF) activities in Egypt and Bahrain (6.6% and 1.7% of exposure) have not yet recorded any credit event. However, APICORP faces potential defaults on its PTF activities in Libya (1.9% of exposure) following the 2011 civil war.

The outlook on APICORP's ratings is stable. The A1 rating assumes that APICORP will continue to pursue the main aims of its five-year business plan: a lengthening of the maturity profile of its liabilities; a diversification and increase of the deposit base; and a moderate increase in the risk-weighted capital adequacy ratio. Overall, the improvement in APICORP’s maturity profile offsets the deterioration in its operating environment.

Organizational Structure and Strategy

APICORP was established as an MDB in September 1974 in accordance with an international agreement signed and ratified by the ten member states of the OAPEC. The largest shareholders are the governments of Saudi Arabia (rated Aa3), the United Arab Emirates (Aa2) and Kuwait (Aa2). Its headquarters is in Dammam, Saudi Arabia, and it has a wholesale banking branch in Manama, Bahrain.

The principal objective of the OAPEC Agreement is the development of regional cooperation in the petroleum industry. In pursuit of this objective, OAPEC has sponsored the creation of four companies: APICORP, the Arab Maritime Petroleum Transport Company (AMPTC), the Arab


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Shipbuilding and Repair Yard Company (ASRY) and the Arab Petroleum Services Company (APSCO). The OAPEC also created a training institute to form a foundation for joint Arab action and Arab economic integration in the petroleum industry. APICORP is independent in its administration and in the performance of its activities. Unlike other MDBs, it carries out its operations in accordance with its statutes, on a commercial basis and with the intention of generating a profit. APICORP usually pays a dividend to shareholders after allocating 10% of annual net income to its legal reserve fund.

The Establishing Agreement of APICORP explicitly grants APICORP privileges throughout OAPEC. These privileges include (1) the pledge and undertaking to support APICORP, jointly and severally; (2) the granting of rights and privileges of Nationality within any member country of OAPEC; (3) support for APICORP’s personnel in entry and residency throughout OAPEC; (4) exemption from payment of duties and all public and financial costs within OAPEC; (5) protection of assets against appropriation; (6) immunity from political risks; and (7) exemption from currency controls, including from convertibility and transfer restrictions. Membership in APICORP is explicitly limited to member countries of OAPEC. Any country that withdraws its membership from OAPEC is obliged to withdraw from APICORP.

APICORP’s mandate is to assist in financing petroleum projects and industries and associated fields of activity of OAPEC members in such ways as would strengthen member states’ economic and financial potential. In order to achieve its purpose, APICORP makes direct equity investments (“Project Direct Equity”, 11% of assets) and extends debt financing (“Project & Trade Finance” loans, 66% of assets). The rest of the assets are invested in Treasury assets. APICORP also provides advisory and treasury services related to oil and gas finance and project development, and publishes macro-economic research on oil and gas.

APICORP’s objective is to provide loans and credit to finance the investments of local, regional, and international sponsors in the energy and petrochemical sectors as well as the trading activities of first-tier Arab exporters and worldwide traders with credit-worthy importing countries. In order to manage country risk, APICORP focuses on appropriate loan structures as well as sharing the risk with governmental or other international financial institutions – a strategy it also follows in its equity investments portfolio. In addition, equity investments are only chosen if they are economically feasible, technically sound and commercially driven. If they are outside the Arab region, there is an additional condition that they must rely on “feedstock” originating from the Arab world. APICORP structures its equity investments so that the size of the stake ensures at least one seat for the Corporation on the Board of the investee company.

In a context of heightened country risk in the Middle East, the Corporation’s strategy for its PTF loans is to maintain the current volume and contain the average maturity of its loan portfolio, while diversifying its equity participations. Instead, it focuses on advisory mandates and trade finance.

APICORP is rare among MDBs in that it takes deposits. Historically deposits and term financing loans have been the primary source of borrowing, although the recent bond issuance signals possible changes. From 1998-2005, deposits from banks were the primary source - accounting for 65% of borrowings, with term financing loans comprising the remainder. In 2006, APICORP started diversifying its funding base when it opened its branch in Bahrain, a wholesale bank operating under an Investment Banking License granted by the Central Bank of Bahrain. APICORP falls under the regulations of the central bank, but, like other offshore banks operating in Bahrain, it does not have access to central bank liquidity facilities. The branch functions to complement the treasury and capital


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market activities of the Corporation and provide banking facilities to clients. As a result, deposits from corporates grew to 37% of APICORP’s borrowings at the end of 2010. In October 2010, APICORP issued a first-time bond on the Saudi market worth SAR 2 billion (US$533 million), which both diversified funding and corrected some of the maturity mismatch. The Corporation’s five-year strategic plan aims at reducing the share for deposits as a source of funding. By 2014, there would be a roughly 50/50 mix of funding from term financing, including medium-term bonds, and deposits.

Governance and Risk Management

APICORP’s risk management apparatus is developing as the organisation devotes resources to building up its capacity and remit. The Head of Risk Management, a Senior Vice President, continues to be somewhat more junior than the operational department heads, who are titled as Executive Vice Presidents. The Head of Risk Management reports directly to the Chief Executive Officer but only indirectly to the Board of APICORP. The Risk Management department examines all new credit and investment proposals but does not have direct veto power over them. There is a separate Audit and Risk Committee that is made up of a select group of board members and is responsible for overseeing corporate governance and risk issues. The Head of Risk Management is a member of the Management Credit Committee, which holds project veto power and presents reports on risk to the Audit and Risk Committee.

APICORP recently introduced indicative risk metrics, including a 15% minimum capital adequacy ratio, a minimum of two months of net cash outflows that liquid asset holdings must cover, and a maximum debt to equity ratio of 3.11.

The Corporation has successfully operated through a number of regional crises without undue difficulty. These include the Iranian revolution (1979), the Iran-Iraq war (1980 to 1988), the Iraqi occupation of Kuwait (1990/91), the US invasion of Iraq in 2003, and a direct attack by militants on its Khobar compound in 2004. It has also successfully managed times of low oil prices, such as 1986 and 1999.

The wave of unrest that started in February 2011 in Bahrain did not affect its operations. All new lending/placements to Bahrain financial institutions were briefly put on hold, and subsequently resumed. Exposure to politically risky countries represents 11% of its total loan portfolio. According to APICORP, the wave of domestic political turmoil in Bahrain and Egypt (8.3% of PTF exposure) has not led to borrowers defaulting on their obligations. In both countries, the energy sector has been relatively spared by domestic turmoil. However, the prolonged conflict in Libya (1.9% of exposure in 2010) is likely to increase non-performing loans. APICORP has not funded energy projects in Syria.

Syria and Libya are both minority shareholders, contributing each 3 percent and 15% of APICORP’s capital base, respectively. They also contribute to the Corporation’s government deposits (US$70 million from Libya, US$30 million from Syria, out of US$222 million in deposits from shareholders). However, it is unlikely that the countries will ask repayment, given that these deposits cannot be repaid without approval from the Board.

One reason for the still-developing risk culture is that APICORP’s asset portfolio is particularly strong – much stronger than an average MDB –, considering the high average creditworthiness of the energy companies towards which most of its lending is oriented.


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Hence there has been less focus on risk management because of this. APICORP has not experienced significant defaults or under-performing assets that would have provided an urgent incentive to develop it. At the end of 2010, gross non-performing loans represented 0.7% of gross PTF loans, of which 100% have been provisioned for, resulting in nil net NPL. These impaired loans are legacy NPLs that result from the default of Iraq state-owned companies after the 1990-1991 war. In 2003, the Corporation started to offset the unpaid dividends against the defaulted loans.

Liquidity

APICORP’s liquidity profile is highly skewed towards short-term liabilities financing long-term loan exposure. This maturity mismatch acts as a constraint on APICORP’s rating. However, according to the Corporation, at the end of 2010 actual liquid assets held were enough to cover at least ten months of net cash outflows, which Moody’s considers to be a robust level. Moreover, APICORP’s liquidity position has improved since 2009, when it represented seven months of cash outflows.

The Corporation manages liquidity by grouping maturing assets and liabilities into four time periods (up to three months, three months to one year, one to five years, and over five years) and matching the cash inflows and outflows – the cumulative gap between the cash flows as a percentage of total liabilities is the relevant ratio that they manage. At the end of 2010, the cash flow gap up to one year was 48%, meaning 48% of liabilities were mismatched due to their short maturities. This ratio has improved since 2009, when it reached 72%, as a result of the Corporation’s willingness to reduce the short-term maturity mismatch. By 2012, APICORP plans to implement a revised policy that will restrict the gap up to five years at 40% –at year-end 2010 the actual gap was 10%.

APICORP is unusual as an MDB in that 57% of its total liabilities are in the form of short-term deposits (from banks, corporates and shareholder governments). Including short-term liabilities such as repo securities, 70% of APICORP’s total liabilities (excluding equity) are short-term (remaining maturity of one year or less). By contrast, 73% of APICORP’s assets are long-term (remaining maturity over one year), with 34% of the total having a remaining maturity of five years or more. This balance sheet maturity mismatch is a credit challenge for the Corporation. However, we notice that the 2010 exercise saw an improvement in APICORP’s maturity profile.

There are some mitigating factors. Deposits from shareholder governments, which accounted for 18% of the deposit base at year-end 2009, are considered stable. Although short-term, governments would be highly unlikely to withdraw their deposits in times of stress. Indeed, Libya and Syria have not withdrawn their deposits in 2011.Shareholder governments have committed, if required, to increasing their deposits with APICORP to a level of $1 billion (of which US$778 million is currently available). They first began depositing with APICORP in 2008 to offset the effects of the global crisis, one of which was a limited withdrawal of bank deposits. In 2009, conventional and Islamic financial institutions withdrew US$ 460 million, followed by a more moderate US$130 million withdrawal in 2010.

Secondly, deposits from corporates (which accounted for 45% of the deposit base last year) are also relatively “sticky” in that they are mainly deposited by companies owned by member states through their state-owned oil companies. Throughout the recent global financial crisis, deposits from corporates continued to increase.


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The issuance of a 5-year bond in November 2010 contributed favourably to the rebalancing of APICORP’s maturity profile by lengthening the average maturity of its liabilities. It raises APICORP’s ability to attract additional deposits from corporates.

APICORP intends to partially rebalance the maturity profile of its liabilities over the medium term. Its business plan targets the reduction of the short-term portion of APICORP’s liabilities (excluding equity) and aims to make this short-term portion more stable. It intends to do this by issuing long-term debt and taking more deposits from governments.

Capital Adequacy

2010

Paid-up Capital (US$

Million) Authorized Capital

(US$ Million) % of Subscribed

Capital % of Callable Capital

APICORP Shareholders 550 1,200 100 100

Above A rating countries 335.5 732 61 61

Investment grade countries 16.5 36 3 3

Non rated countries 181.5 396 33 33

Non investment grade countries 16.5 36 3 3

Capital Structure Of APICORP’s ten member countries, six are publicly rated by Moody’s (Saudi Arabia – Aa3, United Arab Emirates – Aa2, Kuwait – Aa2, Qatar – Aa2, Bahrain – Baa1, Egypt – B1). The capital base is held primarily by investment-grade countries (64%) – although none are Aaa-rated – with the remainder held by sub-investment-grade (3%) or non-rated countries (33%).

Most MDBs (including APICORP) do not have access to central bank liquidity facilities, given their supranational status. Hence, MDBs typically have significantly higher levels of capital adequacy than similarly rated commercial banks. Capital adequacy is an especially pertinent rating factor in the case of APICORP given the skewed maturity profile of its balance sheet.

APICORP calculates its capital adequacy ratio (Tier 1 + Tier 2 Capital/Total Risk-Weighted Exposure) to be 29.2.7% at the end of 2010, lower than most other MDBs. However, APICORP’s ratio exceeds most A-rated commercial banks as well as the Basel II and Central Bank of Bahrain guidelines of 8% and 12% respectively.

Asset Quality APICORP’s internal calculations estimate that the weighted average credit rating of its total asset portfolio is Aa. This breaks down into Project and Trade Finance Loans (Loans) at Aa, Project Direct Equity Assets (Direct Equity) at A and Treasury Assets at A. Loans make up 74% of APICORP’s assets, direct equity 9% and Treasury 17%.

Around 46% of APICORP’s Loans are guaranteed. The majority of the guarantees are provided by government-owned entities (75%), while 9% are provided by private sector third party entities and 16% by governments.


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Gross non-performing loans at the end of 2010 amounted to 0.7% of total loans and were fully provisioned, making net non-performing loans amount to nil. Current non-performing loans include loans made to companies in Iraq and Sudan that were affected by international sanctions.

The credit strength of APICORP’s Direct Equity portfolio derives from the fact that it is concentrated in profitable energy-related projects in the Arab world that mostly have indirect government ownership through state-owned oil companies. APICORP’s main clients are majority-owned by Arab state-owned energy companies: Saudi Basic Industries Corporation, Qatar Petroleum, Kuwait Petroleum Corporation, Egyptian General Petroleum Corporation, Oman Oil Company, Sonatrach, L’Enterprise Tunisienne d’Activites Petrolieres, Libyan National Oil Company, and Saudi Aramco: BAPCO, ENOC, ADNOC, Sytrol.

Some of APICORP’s Direct Equity investments contain significant “hidden value” in that they are mostly accounted for at book value but have appreciated since purchase. APICORP has conducted internal valuations of all direct equity investments, which have come out as being valued significantly above their book value, estimated at over US$1 billion. APICORP’s recent (October 2011) divestiture of a 12.5% stake in Banagas to Boubyan Petrochemical Company (Kuwait) provides an example of significant revaluation.

APICORP has a de facto preferred creditor status, although this status is not written into any loan documentation. Articles 6 & 12 of the Establishing Agreement state APICORP’s aims as being to “preserve and protect APICORP’s assets, rights and privileges of nationality, as well as its interests [held] internationally by its Members.” Article 15 grants it preferential access to foreign exchange in the event of a country foreign exchange crisis. Consistent with these preferences, APICORP loans are exempt from country risk provisioning when applicable, and have never been included in general country debt rescheduling. Where a Paris Club rescheduling has taken place, APICORP has only experienced one case where it agreed to be included - Algeria in 1995, and it subsequently recovered 100% of its outstanding loan balance. Similarly, APICORP has never been subject to mandatory new money obligations under any country debt rescheduling. Recent examples of this include the 2003 Paris Club rescheduling and debt-forgiveness of Iraqi sovereign obligations, where APICORP’s outstanding loans to government-related entities were not included in any of its provisions.

Given its mandate (to finance energy-related projects in member states), APICORP’s asset portfolio is necessarily concentrated – in energy and in the Middle East region. This is similar to other regional MDBs. Yet APICORP’s assets are concentrated even within these buckets. APICORP has a particularly high geographic concentration in Saudi Arabia and Qatar (over 70% of Loans) and in petrochemicals (34% of Loans). By comparison, the IBRD’s top three countries (China, Brazil and Turkey) account for 30% of loans outstanding; for the Inter-American Development Bank, the same figure is 56% (Brazil, Argentina and Mexico are the largest recipients); and for the Black Sea Trade and Development Bank the top three (Russia, Ukraine and Turkey) represent 58% of loans outstanding. However, APICORP’s high level of asset concentration is mitigated by the assets’ strong performance and low break-even oil prices (the highest break-even oil price for any of APICORP’s projects is $35/barrel).

Contractual Support APICORP is rather rare among MDBs in that it does not have callable capital – an unconditional and full-faith obligation of each member country to provide additional capital for the sole purpose of servicing debt, the fulfilment of which is independent of the action of other shareholders. However, APICORP’s shareholders have explicitly committed to support the institution on a “joint and several”


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basis. Article 6 of the Articles of Agreement states: "The Member States undertake, jointly and severally, to support the Corporation, protect it and embrace its causes in every way that ensures the protection of its rights and interests internationally and otherwise and undertake to facilitate all the activities related to its objectives and to adopt all possible measures to that end." No other MDB has shareholder support in this more collective form. However, the language is open to interpretation and is not an explicit and quantifiable form of support like callable capital. Hence, creditors do not benefit from the same level of protection that other MDBs with callable capital can provide.

Profitability Unlike other MDBs and despite having a development mandate, APICORP carries out its operations with the intention of generating a profit and typically pays dividends to shareholders (the Nordic Investment Bank also pays dividends). Moody’s typically assesses the profitability of an MDB in terms of the contribution that it makes to building up or depleting the institution’s capital base. This analysis is still appropriate in the case of APICORP as Moody’s does not believe member support is largely contingent upon the receipt of dividends, as evidenced by the Board’s decision in 2008, 2009 and 2010 not to distribute dividends in order to strengthen the balance sheet and liquidity position of the Corporation.

At year-end 2010, APICORP reported positive results of US$95 million in line with average net income over the past five years of $62 million and an improvement over the US$59 million result recorded in 2009. Income from interest was weaker in 2010 compared to 2009 (-13%), which already saw a steep decline (-48%). Fee income picked up by 30% in 2010, but did not return to its pre-crisis levels. APICORP’s treasury activities, similar to those of other MDBs, were impacted by the turmoil in the financial markets in 2008, with write-downs of $56 million. However, dividend income increased 13% in 2010 after a robust 2009 performance.

2005 and 2007 already registered significantly higher-than-average results of US$95 million and US$80 million, respectively, largely owing to gains on available-for-sale Direct Equity investments of US$59 million and US$5 million. However, the level of income reached in2010 relies on both gains on available-for-sale securities and a robust dividend income..

Return on assets for 2010 was 2.2%, compared to a five-year average of 1.7%. Return on equity has been very strong with an average of 6.2% and end-2010 results of 8.3%. APICORP has a proven track record of positive results that are contributing to the steady build-up of capital.

Strength of Member Support

Ability to Support According to Moody’s calculations, the weighted average rating of APICORP’s shareholders was approximately A3 at the end of 2010. This is lower than most other higher-rated MDBs, many of which are backed by Aaa-rated governments. Those high-rated MDBs that do have a lower weighted average shareholder rating have stronger capital-adequacy ratios than APICORP.

Willingness to Support APICORP’s shareholders have shown a strong willingness to support the institution. In 1981, 1996, 2003, and more recently in May 2011, shareholders agreed to and participated in general capital increases. When the Corporation was established in 1974, the subscribed capital was US$340 million.


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This rose to US$400 million, US$460 million, US$550 million and US$750 million in each respective year in which a capital increase was implemented.

As mentioned above, APICORP’s shareholders are unusual in that they have committed to supporting the organisation on a “joint and several” basis. Although the wording of this pledge, in Moody’s opinion, falls short of a full financial guarantee for creditors, it does indicate a stronger willingness to support than the pro rata wording of support pledges seen at other MDBs.

In addition, APICORP’s deposit-taking structure allows it to receive member support outside of the usual capital increases. In 2008, shareholders pledged a US$1 billion line of credit in the form of deposits, which can only be withdrawn following a board resolution. To date, US$222 million of this amount has been deposited, and the balance of US$778 million is currently available as a contingent support for liquidity..

As one of the companies created by OAPEC to help achieve its objective, APICORP’s prospects for long-term continued member support are strong. However, APICORP does face commercial competition given its operation in profitable energy markets. Currently, there are 15 banks that compete with the Corporation to obtain mandates.

Between 2005 and 2007, there was strong growth in competition from financial institutions which were attracted to the region’s high economic prosperity. As a result, APICORP faced pressure on its margins and advisory fees. Although competition has decreased following the global financial crisis, there could be a risk that member support could potentially weaken over time if APICORP’s role were perceived to be fulfilled by market entities or other institutions. However, the May 2011 capital increase demonstrates shareholder’s confidence in the Corporation’s business model.

Rating History

Issuer Rating Outlook Date

Long-term Short-term

Rating Assigned A1 P-1 Stable June-10


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Company Annual Statistics

APICORP

2003 2004 2005 2006 2007 2008 2009 2010

Balance Sheet (US$ Thousands)

ASSETS

Cash and cash equivalents 15,564 16,079 18,288 10,264 15,510 9,391 28,860 15,392

Trading securities 71,004 75,858 68,718 63,698 50,822 98 63 61

Available-for-sale securities 394,367 420,713 558,328 582,087 817,648 616,940 622,383 903,292

Available-for-sale direct equity investments

185,648 208,111 234,318 256,731 343,266 282,848 338,854 365,634

Deposits with banks 209,690 193,669 264,920 345,000 391,575 227,618 464,918 439,873

Syndicated and direct loans (net) 1,149,715 1,149,413 1,141,372 1,304,554 1,892,499 2,371,196 2,621,330 2,541,968

o/w Non-performing loans (net) 43,517 36,387 32,858 26,395 21,262 17,652 17,345 17,149

Property and equipment 45,048 42,734 40,473 38,300 36,518 34,174 32,070 29,263

Other assets 17,390 14,019 15,433 34,090 25,519 27,963 10,622 16,140

TOTAL ASSETS 2,088,426 2,120,596 2,341,850 2,634,724 3,573,357 3,570,228 4,119,100 4,311,623

LIABILITIES

Deposits from banks 874,375 858,674 982,440 1,155,668 1,342,906 1,388,641 930,749 770,385

Deposits from corporate 0 0 0 5,000 294,730 432,334 757,091 804,261

Deposits from shareholders 0 0 0 0 0 15,000 370,438 222,276

Securities sold under agreement to repurchase

0 0 0 0 225,557 159,558 385,368 408,289

Term financing 498,559 499,098 498,478 549,045 648,033 648,590 649,148 399,547

Bonds 0 0 0 0 0 0 0 531,018

Other liabilities 8,593 18,408 12,473 28,496 41,728 31,355 24,671 34,869

Total Liabilities 1,381,527 1,376,180 1,493,391 1,738,209 2,552,954 2,675,478 3,117,465 3,170,645

EQUITY

Share capital 550,000 550,000 550,000 550,000 550,000 550,000 550,000 550,000

Legal reserve 84,600 88,500 98,000 103,100 111,300 114,100 120,000 129,600

General reserve 15,000 15,000 15,000 15,000 66,539 66,539 108,425 161,061

Available-for-sale fair value reserve 0 68,059 97,516 134,594 255,488 122,225 170,574 214,737

Revaluation reserve 24,536 0 0 0 0 0 0 0

Retained earnings 32,763 22,857 87,943 93,821 37,076 41,886 52,636 85,580

Total Equity 706,899 744,416 848,459 896,515 1,020,403 894,750 1,001,635 1,140,978

TOTAL LIABILITIES AND EQUITY 2,088,426 2,120,596 2,341,850 2,634,724 3,573,357 3,570,228 4,119,100 4,311,623

Off-Balance Sheet Exposures 593,259 563,494 563,873 807,722 1,051,857 1,008,317 356,818 371,366




APICORP

2003 2004 2005 2006 2007 2008 2009 2010

Financial assets distribution (% of total)

P&TF Net Loans 66.5 64.6 59.0 60.9 62.0 72.5 73.2 66

Projects (i.e. Equity Investments) 10.7 11.7 12.1 12.0 11.2 8.6 9.5 11

Treasury Investments 22.8 23.7 28.9 27.2 26.8 18.9 17.4 23

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Income Statement (US$ Thousands)

Interest income 39,797 42,925 71,500 116,684 153,703 134,763 69,667 60,580

Interest expense -20,599 -23,778 -49,484 -87,195 -112,935 -104,488 -55,771 -43,731

Net interest income 19,198 19,147 22,016 29,489 40,768 30,275 13,896 16,849

Fee income 1,281 4,297 2,461 2,318 3,625 6,659 1,540 2,002

Fee expense -157 -120 -122 -159 -180 -114 -128 -200

Net fee income 1,124 4,177 2,339 2,159 3,445 6,545 1,412 1,802

Dividend income 8,414 10,697 16,382 30,103 31,649 57,988 59,501 67,048

(Loss) gain on trading securities 9,907 9,026 9,941 5,640 6,686 -3,893 -35 -2

Gain on available-for-sale securities 3,013 124 3,802 1,331 6,039 2,982 104 32,743

Gain on available-for-sale direct equity investments

0 0 58,755 0 5,433 0 0 0

Impairments losses (reversals) 4,620 7,968 -3,692 1,914 7,982 -45,368 -1,542 1,746

General administrative expenses -14,539 -17,327 -16,731 -20,326 -22,296 -23,553 -21,958 -25,849

Other income 1,800 5,404 2,119 698 33 2,634 7,158 843

Other operating expenses -20 -364 -345 -30 0 0 0 0

NET INCOME 33,517 38,852 94,586 50,978 79,739 27,610 58,536 95,180

Financial Ratios

Profitability (%)

Return on Assets (ROA) 1.6 1.8 4.0 1.9 2.2 0.8 1.4 2.2

Return on Equity (ROE) 4.7 5.2 11.1 5.7 7.8 3.1 5.8 8.3

Term Financing Interest Coverage Ratio (X)

3.8 3.8 4.9 1.7 2.2 1.2 7.3 28

Term Financing + Deposit Interest Coverage Ratio (X)

1.9 1.9 2.4 0.7 0.7 0.3 1.1 2.3

Capital Adequacy (%) 26 22 25.7 29.2

Usable Equity/Total Assets [1] 33.8 35.1 36.2 34.0 28.6 25.1 24.3 26.5

Usable Equity/ Net Loans [1] 61.5 64.8 74.3 68.7 53.9 37.7 38.2 44.9

Usable Equity/Loans + Equity Investments [1]

52.9 54.8 61.7 57.4 45.6 33.7 33.8 39.2

Usable Equity/Term Financing [1] 141.8 149.2 170.2 163.3 157.5 138.0 154.3 285.6

Usable Equity/Deposits [1] 80.8 86.7 86.4 77.2 62.3 48.7 48.7 63.5

Usable Equity/Term Financing + Deposits [1]

51.5 54.8 57.3 52.4 44.6 36.0 37.0 51.9

Usable Equity/Total Liabilities [1] 51.2 54.1 56.8 51.6 40.0 33.4 32.1 38.4




APICORP

2003 2004 2005 2006 2007 2008 2009 2010

Legal + General Reserves/Deposits 11.4 12.1 11.5 10.2 10.9 9.8 11.1 16.2

Capital Adequacy -- -- -- -- 26.0 22.0 25.7 29.2

Liquidity (%)

Liquid Assets/Total Assets 33.1 33.3 38.9 38.0 35.7 23.9 27.1 31.5

Liquid Assets/Term Financing 138.5 141.5 182.6 182.3 196.8 131.7 172.0 340

Liquid Assets/Deposits 79.0 82.3 92.7 86.2 77.9 46.5 54.2 75.6

Liquid Assets/Term Financing + Deposits 50.3 52.0 61.5 58.6 55.8 34.4 41.2 61.9

Liquid Assets/Total Liabilities 50.0 51.3 61.0 57.6 50.0 31.9 35.8 42.8

Liquid Assets/Total Liabilities + Off Balance Sheet Exposure

35.0 36.4 44.2 39.3 35.4 23.2 32.1 38.4

Borrowings (%)

Term Financing/Total Liabilities 36.1 36.3 33.4 31.6 25.4 24.2 20.8 12.6

Term Financing/Total Assets 23.9 23.5 21.3 20.8 18.1 18.2 15.8 9.3

Deposits/Total Liabilities 63.3 62.4 65.8 66.8 64.1 68.6 66.0 56.7

Deposits/Total Assets 41.9 40.5 42.0 44.1 45.8 51.4 50.0 41.7

Asset Quality (%)

Net NPL/Net Loans 3.8 3.2 2.9 2.0 1.1 0.7 0.7 0.7

Total Reserves/Gross NPL (X) 1.7 2.5 3.0 3.7 6.3 4.4 5.8 7.4

Total Reserves/Net Loans 10.8 14.9 18.4 19.4 22.9 12.8 15.2 19.9

[1] Usable equity= Share Capital + Reserve Funds+ Retained Earnings

Capital Subscriptions and Voting Power as of Year-End 2010 (US$ Thousands)

Issued and Fully Paid Authorized Capital Fully paid % of total

United Arab Emirates 93,500 204,000 17

Saudi Arabia 93,500 204,000 17

Kuwait 93,500 204,000 17

Libya 82,500 180,000 15

Iraq 55,000 120,000 10

Qatar 55,000 120,000 10

Algeria 27,500 60,000 5

Bahrain 16,500 36,000 3

Syria 16,500 36,000 3

Egypt 16,500 36,000 3

550,000 1,200,000 100




Project and Trade Finance Loans by Country (US$ Thousands, 2010)

GROSS Outstanding Balance %Of Total Commitment Outstanding

Saudi Arabia 1,168,395 44.49 114,825

Qatar 671,027 25.55 18,285

Egypt 174,190 6.63 44,496

Kuwait 165,627 6.31 118,196

Oman 95,254 3.63 0

United Arab Emirates 94,999 3.62 0

Iraq 51,849 1.97 0

Libya 50,385 1.92 5,000

Bahrain 44,913 1.71 0

Switzerland 31,327 1.19 0

Algeria 30,026 1.14 0

Netherlands 25,000 0.95

Sudan 16,560 0.63 0

Singapore 6,817 0.26 8,183

2,626,369 100.00 308,986

Project and Trade Finance Loans by Sector (US$ Thousands, 2010)

Gross outstanding exposure %of total

Petrochemicals 896,669 34.14

Gas Processing 349,258 13.30

Marine Transportation 305,275 11.62

Power & Water 252,695 9.62

Specialty Chemicals 142,283 5.42

Fertilizers 212,366 8.09

Refineries 161,789 6.16

Trade Finance 111,031 4.23

Energy Intensive Sector 132,709 5.05

Upstream Oil & Gas 21,429 0.82

Oil Field Services 40,866 1.56

2,626,369 100.00

Note: Numbers may not sum due to rounding.




Moody’s Related Research

Credit Opinion:

» APICORP

Rating Action:

» APICORP, June 2010

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Authors Gabriel Torres Mathias Angonin

Production Associate Joaquin Jimenez

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