Fitch Affirms 11 UAE Banks
KEY RATING DRIVERS
BANKS' IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The affirmation of the banks' Long-Term IDRs, Support Ratings and Support Rating Floors, except for Emirates Islamic Bank PJSC (EI) and Commercial Bank International (CBI), reflects the extremely high probability of support available from the UAE authorities, and the government of Abu Dhabi (AA/Stable/F1+) and other emirates, if required.
Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and on-going revenues mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties and part government ownership links of a number of banks.
Six of the sovereign support driven banks - Abu Dhabi Islamic Bank (ADIB), Al Hilal Bank (AHB), Commercial Bank of Dubai (CBD), Dubai Islamic Bank (DIB), Mashreqbank (Mashreq) and Noor Bank (Noor) - have Support Ratings of '1', reflecting the extremely high probability of state support. Three banks - Bank of Sharjah (BOS), National Bank of Ras Al Khaimah (RAKBANK) and Sharjah Islamic Bank (SIB) - have a Support Rating of '2', reflecting lower, but still high, probability of state support. The Support Ratings of '1' for AHB and Noor also factors in the significant government and ruling family ownership by their respective parents.
Fitch assesses each bank's systemic importance relative to other banks in the banking system, and takes into account, among other things, market share and franchise.
The 'A+' Support Rating Floor of the two Abu Dhabi banks - ADIB and AHB - are at the Abu Dhabi banks' Support Rating Floor for domestic systemically important banks (D-SIB) of 'A+', reflecting their high systemic importance. Abu Dhabi banks' D-SIB Support Rating Floor is one notch higher than other UAE banks, due to Abu Dhabi's superior financial flexibility.
The 'A' Support Rating Floors of DIB and Mashreq are at the UAE D-SIB Support Rating Floor of 'A', reflecting their D-SIB status in the UAE and in particular Dubai. CBD's and Noor's Support Rating Floor is one notch below the UAE D-SIB Support Rating Floor due to Fitch's view that these are less systemically important based on smaller size and market share, and more niche franchises, compared with DIB and Mashreq. The Support Rating Floors for the remaining three banks are 'BBB+', two notches below the UAE D-SIB Support Rating Floor, reflecting Fitch's view of their lower relative systemic importance, due to smaller market shares and franchises.
The ADIB, AHB, DIB, Noor, SIB and Tamweel (guaranteed by Dubai Islamic Bank) sukuk vehicles trust certificate issuance programmes; the senior unsecured notes issued under BOS Funding Limited, CBD (Cayman) Limited and RAKFUNDING CAYMAN LTD; and the senior unsecured notes issued directly by the other banks, are rated in line with their respective banks' IDRs and are therefore subject to the same rating drivers.
We have reviewed the sukuk documentation, structure, terms and conditions and there has been no material change in the certificate programmes for the above sukuk vehicles since the last review. For more details refer to the latest sukuk vehicle rating action commentaries on our website.
EI's IDRs and Support Rating reflect Fitch's view that EI is a key and integral subsidiary of its 99.89% shareholder, Emirates NBD (ENBD; A+/Stable/F1). ENBD's IDRs are based on potential support available from the UAE and Dubai authorities, if need be. In Fitch's view, this support would flow through to EI given EI's role and track record in the group (offering retail, SME and small corporate Islamic finance services for the group), the high reputational risk to ENBD of an EI default, as well as the Central Bank of United Arab Emirates' (CBUAE) inclination to favour support as EI operates in the same home market as ENBD.
The rating of the current outstanding certificates maturing in January 2017 and January 2018 respectively, under EI Sukuk Company Ltd (EI Sukuk, previously EIB Sukuk Company Ltd.), are driven by ENBD's Long-Term IDR of 'A+'/Stable. This is due to the sukuk structure where ENBD, as the guarantor, provides a direct and unconditional guarantee of EI's sukuk obligations under the transaction documents as specifically set out in the master trust deed. ENBD undertakes that its obligations under the guarantee will at all times rank at least pari passu with ENBD's other senior unsecured obligations.
The programme was updated in May 2016. Among other changes, outstanding certificates maturing May 2021 and any further issuance under the updated programme will not benefit from an ENBD guarantee. The updated certificate issuance programme's rating is driven solely by EI's IDR and senior unsecured ratings of 'A+'. This reflects Fitch's view that default of these senior unsecured obligations would reflect default of EI in accordance with Fitch's rating definitions.
CBI's IDRs and Support Rating reflect Fitch's view that CBI is a key affiliate of Qatar National Bank (QNB; AA-/Stable/F1+) due to its role as QNB's vehicle for UAE lending, an important market for QNB. They also incorporate Fitch's belief that a CBI default would constitute high reputational risk for QNB as CBI and QNB share the same logo, and the role it plays for QNB. The ratings also reflect our belief that any required support would be easily manageable for QNB given the small size of CBI in relation to QNB. However, our view of potential support is constrained by QNB's minority 40% stake in CBI, which is the maximum allowed under UAE law for foreign ownership. Fitch believes QNB would be willing to increase its ownership if allowed under UAE regulations.
QNB's IDRs are based on potential support available from the Qatar authorities, if necessary. In Fitch's view, this support would flow through QNB to CBI given the role it plays for QNB.
The Short-Term IDR of 'F1', the higher of the two possible for Long-Term IDR of 'A-', reflects the support available to CBI from its higher-rated parent.
SUBORDINATED DEBT
Mashreq's subordinated debt is notched off the bank's IDR, as is common in the GCC, reflecting Fitch's view that the probability of sovereign support remains sufficiently strong to extend to the bank's subordinated notes. The one notch difference reflects relative loss severity.
BANKS' VIABILITY RATINGS (VRs)
Abu Dhabi, and by extension the UAE, is one of the largest economies in the GCC, with solid growth prospects supported by significant government spending on infrastructure projects, and an expanding non-oil private sector, particularly in Dubai. The banks all benefit from a solid operating environment, and most of them maintain sound liquidity, capital ratios, and pre-impairment operating profits, enabling them to absorb high credit costs, if necessary.
Asset quality metrics continue to improve, particularly in Dubai banks which suffered the most from the poor performance of the real estate sector and government-related entity (GRE) problem loans during the global financial crisis, although much of the improvement is due to strong loan growth. High loan and deposit concentration is a constraint on the VRs across the sector, but where exposure is directly to the Abu Dhabi government Fitch views it as less unfavourable.
ADIB
ADIB's VR reflects the bank's underlying weak, but slightly improving, core capitalisation and asset quality, considerable balance sheet concentrations and high related-party lending. The rating also factors in the bank's strong and resilient franchise, a capacity to absorb large losses through robust pre-impairment operating profit, and the bank's sound balance-sheet liquidity.
AHB
AHB's VR reflects the bank's weak asset quality and earnings, high loan concentration and small franchise. The VR also reflects AHB's adequate capital ratios and liquidity.
BOS
BOS's VR reflects the bank's small franchise, high lending concentrations, weak asset quality, and some risks over related-party loans and investments, which are common in the region. The VR also factors in BOS's satisfactory reserve coverage, adequate capitalisation and healthy liquidity.
CBI
CBI's VR primarily reflects the bank's limited franchise, less diversified business model, weak but improving asset quality metrics and weak capital ratios in light of the bank's high loan growth strategy. The VR also takes into account the clean-up of CBI's balance sheet through the write-off of legacy impaired loans, tightened underwriting standards, albeit with a still limited track record, and the intrinsic ordinary support, including liquidity support, the bank enjoys from QNB.
CBD
CBD's VR reflects the bank's solid capitalisation and consistent profitability in recent years despite challenging market conditions. The key constraints are the bank's high impaired loan ratio and slightly lower reserve coverage than peers, although asset quality metrics are improving, particularly when factoring in the bank's other problematic loans (loans past due over 90 days but not impaired and restructured loans). CBD's small niche franchise, high concentration risk, and the risks of operating largely in Dubai are also a constraint, albeit to a lesser extent.
DIB
DIB's VR reflects the bank's underlying weak, but improving, asset quality, sizable financing book concentration, high exposure to real estate and consequent vulnerability to event risk, as well as significantly above-market average loan growth. The VR also factors in the bank's strong domestic franchise, healthy profitability, as well as sound liquidity and funding, with a large and stable deposit base.
EI
EI's VR reflects the bank's weak asset quality from legacy lending, particularly in real estate and, to a lesser extent, the bank's capital ratios being below the average of UAE peers, particularly given the bank's underlying asset quality and problem financing. The VR also reflects EI's adequate liquidity, growing customer base, improving profitability and diversified revenue streams.
MASHREQ
Mashreq's VR reflects the bank's somewhat weak, but improving, asset quality and consequent vulnerability to event risk and potentially large losses, through sizeable loan concentrations and a renegotiated loan book, particularly to Dubai GRE exposures. It also reflects corporate governance risks regarding the bank's board composition.
The rating continues to be underpinned by the bank's strong and resilient franchise as well as the bank's capacity to absorb large losses through healthy pre-impairment profitability and solid capitalisation. The bank also benefits from a comfortable liquidity position, primarily due to its large and stable, albeit concentrated, deposit base.
Noor
The VR reflects Noor's small but growing franchise, limited track record, weak but improving asset quality, high concentration in the financing book, and in this respect low capital levels. The VR also takes into account Noor's adequate liquidity, growing and more diversified customer base, improving profitability and diversified income stream.
RAKBANK
RAKBANK's VR is constrained by the bank's fairly small franchise (1.6% of UAE banking assets) and a higher risk but higher reward model relative to other UAE banks. The rating also reflects RAKBANK's leading retail business, healthy capitalisation and adequate funding and liquidity, supported by a large stable customer deposit base. The bank enjoys strong profitability compared with peers, partly reflecting its high-margin business.
SIB
SIB's VR is constrained by the bank's modest franchise, high lending concentrations, and some risks over large related-party exposures. However, it also factors in the bank's strong capital ratios and sound funding profile.
RATING SENSITIVITIES
BANKS' IDRs, SENIOR DEBT, SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings and Support Rating Floors are sensitive to a reduction in the perceived ability or willingness of the authorities to provide support to the banking sector, or a change in Fitch's view of support in the UAE. Given the robust economy, the authorities' strong track record of support for local banks and no plans for resolution legislation at this stage, downward pressure is viewed as low.
Where the banks' IDRs are driven by sovereign support, they would be sensitive to a change in their Support Ratings or Support Rating Floors through a change to the sovereign rating.
The ADIB, AHB, DIB, EI, Noor, SIB and Tamweel sukuk vehicles; the senior unsecured notes issued by, BOS Funding Limited, CBD (Cayman) Limited and RAKFUNDING CAYMAN LTD; and the senior unsecured notes issued directly by the other banks, are subject to the same sensitivities as the respective banks' IDRs.
EI's IDRs and Support Rating are sensitive to a change in ENBD's IDRs. Unless its importance to ENBD diminishes, the IDRs of EI will continue to be equalised with ENBD's. At present Fitch views the likelihood of any change as small. As such, the Stable Outlook on EI's Long-Term IDR mirrors that of ENBD. In turn, ENBD's IDRs are sensitive to a change in the UAE's and Dubai authorities' ability or propensity to provide support.
CBI's IDRs and Support Rating are sensitive to a change in QNB's IDRs or a change in Fitch's view of CBI's relative importance to its parent. In turn, QNB's IDRs are sensitive to a change in the Qatari authorities' ability or propensity to provide support if needed. At present Fitch views the likelihood of any change as small. The Stable Outlook on CBI's Long-term IDR mirrors that on QNB.
SUBORDINATED DEBT
Mashreq's subordinated debt is sensitive to a change in the bank's IDR.
BANKS' VRs
Asset quality deterioration and rapid loan expansion, and subsequent reduction in capital ratios, would be the most likely drivers of negative actions of the VRs of banks in this peer group. Reduced concentration in loans and deposits could be beneficial for the VRs.
ADIB
ADIB's VR remains sensitive to deterioration in asset quality, capital or profitability. A sustained improvement in asset quality and capital ratios could lead to an upgrade in ADIB's VR.
AHB
Upside is currently limited unless the bank sees an improvement in its asset quality metrics and a reduction in financing concentration. Downside could arise if asset quality metrics continue to deteriorate, further impacting the bank's profitability and capitalisation.
BOS
Upside is somewhat limited, given the bank's weak asset quality indicators. The VR could be downgraded if asset quality deteriorates and impacts the bank's profitability and capital position.
CBI
Further evidence of CBI implementing its strategy, building its franchise and growing its balance sheet with no material deterioration in the bank's risk indicators could contribute to an upgrade. Upside for the VR could also arise from improvements in the underlying asset quality and capital ratios.
Deterioration in asset quality or capital, however, could be negative for the VR.
CBD
A downgrade could result from significant deterioration in asset quality leading to weaker capital ratios. An upgrade may result from further strengthening of the franchise and further recovery of problem loans.
DIB
DIB's VR remains sensitive to deterioration in asset quality affecting the bank's capital or profitability. The effect of continued high loan growth poses a risk to the bank's capital ratios. A track record of asset quality performance and a further reduction in single-name and sector concentration could lead to an upgrade.
EI
Upside for the VR could arise from improvements in the underlying asset quality and capital ratios. Further evidence of EI implementing its strategy and growing its financing book with no material deterioration in the bank's risk indicators would also contribute to an upgrade.
The VR may be downgraded if the bank sees material deterioration in asset quality, further impacting its capital ratios, loss absorption capacity and profitability.
MASHREQ
Mashreq's VR remains sensitive to deterioration in asset quality affecting the bank's capital ratios. An upgrade could result from further improvement in asset quality and a track record of repayment of restructured loans.
Noor
Upside could arise from improvements in asset quality, particularly repayment of the large Dubai GRE exposures (restructured exposures which are currently classified as performing), and in capital. Further evidence of Noor growing its franchise and building a track record with no material deterioration in the bank's risk indicators would also contribute to an upgrade.
The VR may be downgraded on material deterioration in asset quality further impacting the bank's profitability and capitalisation.
RAKBANK
The VR could be negatively affected by further deterioration in the bank's asset quality metrics and larger credit losses that are not absorbed by the bank's strong capital position. In the longer term the rating could be upgraded if the bank grows its franchise and further diversifies away from higher-risk segments.
SIB
Upside is limited by the bank's fairly small franchise within the UAE banking sector and concentrated financing portfolio. Downside could arise from deterioration in asset quality affecting the bank's profitability and eroding capital beyond a comfortable level.
The rating actions are as follows:
Abu Dhabi Islamic Bank:
Long-Term IDR affirmed at 'A+'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
ADIB Sukuk Company Limited:
Trust certificate issuance programme affirmed at 'A+'/'F1'
Senior unsecured certificates affirmed at 'A+'
Al Hilal Bank:
Long-Term IDR affirmed at 'A+'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
AHB Sukuk Company Limited:
Trust certificate issuance programme affirmed at 'A+'/'F1'
Senior unsecured certificates affirmed at 'A+'
Bank of Sharjah:
Long-Term IDR affirmed at 'BBB+', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
BOS Funding Ltd:
Senior unsecured notes affirmed at 'BBB+'
Commercial Bank International
Long-Term IDR affirmed at 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '1'
Commercial Bank of Dubai P. S.C:
Long-Term IDR affirmed at 'A-', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured debt affirmed at 'A-'/'F2'
CBD (Cayman) Limited:
Senior unsecured notes affirmed at 'A-'/'F2'
Dubai Islamic Bank:
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
DIB Sukuk Company Limited:
Senior unsecured trust certificates affirmed at 'A'
Tamweel Funding III Ltd:
Guaranteed senior unsecured trust certificates affirmed at 'A'
Emirates Islamic Bank PJSC:
Long-Term IDR affirmed at 'A+'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability rating affirmed at 'bb-'
Support Rating affirmed at '1'
EI Sukuk Company Ltd.:
Senior unsecured trust certificates affirmed at 'A'+
Guaranteed senior unsecured trust certificates affirmed at 'A+'
Mashreqbank:
Long-Term IDR affirmed at 'A', Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
Senior unsecured debt affirmed at 'A'/'F1'
Subordinated debt affirmed at 'A-'
Noor Bank:
Long-Term IDR affirmed at 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Noor Sukuk Company Limited:
Senior unsecured trust certificates affirmed at 'A-'
RAKBANK:
Long-Term IDR affirmed at 'BBB+', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
RAKFUNDING CAYMAN LIMITED:
Guaranteed EMTN programme affirmed at 'BBB+'/'F2'
Sharjah Islamic Bank:
Long-Term IDR affirmed at 'BBB+', Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bb+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
SIB Sukuk Company III Limited:
Senior unsecured trust certificates affirmed at 'BBB+'
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