OREANDA-NEWS. Fitch Ratings has affirmed Dunia Finance LLC's (Dunia) Long-Term Issuer Default Rating (IDR) at 'BB' and Short-Term IDR at 'B'. The Outlook on the Long-Term IDR is Stable.

Dunia is a UAE finance company, offering smaller ticket predominantly unsecured loans, with a particular franchise among salaried expatriates from emerging markets.

KEY RATING DRIVERS

IDRS

Dunia's IDRs primarily reflect the company's significant exposure to credit risk, inherent within unsecured lending and amplified by the rapid growth rate of Dunia's loan book. They also take into account the company's prudent - albeit increasing - leverage, and its wide net interest margin, which helps offset the impact of impairment on Dunia's adequate profitability.

Dunia's net impairment charge rose by 97% in 2015, significantly faster than gross loans (up 34% yoy), indicating worsening asset quality largely due to a generally more challenging operating environment for consumer lending in UAE. However, Dunia's write-off policy is adequate (the company writes off all loans at 120 days past due) and loans are appropriately priced (net impairment charges accounted for 58.4% of pre-impairment operating profit in 2015 compared with 44.8% in 2014). Asset quality should also benefit from improving client data as Dunia makes increasing use of Al Etihad Credit Bureau, which has been issuing credit reports on prospective borrowers since November 2014.

Net loans and advances grew by 33.7% yoy in 2015 to AED2.01bn (2014: 46.8% to AED1.50bn), continuing the rapid rate of increase since Dunia's formation in 2008. We expect growth to slow down somewhat as Dunia adjusts to weakening credit conditions.

Dunia does not hold a banking licence, and the ratings do not factor in any state support. However, Dunia is separately regulated by the Central Bank of UAE and required to observe a minimum capital ratio of 15%, as opposed to 12% for banks. At 31 December 2015 this was well above the requirement, at 33.11% (2014: 38.97%). The company's debt to tangible equity ratio remains low compared with other finance companies (1.81x at end-2015; 1.36x at end-2014), which is supportive of Dunia's IDRs.

As a non-bank financial institution, Dunia does not take retail deposits. Funding is principally from corporate deposits, supplemented by bank lines for liquidity purposes. The corporate deposits retain some rate and confidence sensitivity, but Dunia continued to make progress in 2015 in increasing the proportion which are non-puttable, and therefore more certain in their length of retention, as well as growing its supplementary bank facilities.

Dunia's shareholders are Fullerton Financial Holdings Pte (FFH; 40% ownership), a wholly-owned subsidiary of Temasek Holdings Pte Ltd, the Singapore sovereign wealth fund; Mubadala Development Company PJSC (Mubadala; AA/Stable; 31% ownership), a business development and investment company wholly-owned by the government of Abu Dhabi; Al Waha Capital PJSC (25% ownership), a diversified investments holding company, whose main institutional shareholders are Mubadala and Abu Dhabi Investment Company (ADIC); and A. A. Al Moosa Enterprises LLC (4% ownership), a prominent real estate group in UAE. However, Dunia's ratings do not incorporate any expectation of institutional support, as Fitch regards Dunia as still ultimately only of limited importance to its shareholders.

The Stable Outlook on the Long-Term IDR reflects our view that Dunia should continue to report adequate profitability and contain further asset quality deterioration while maintaining leverage broadly at current levels.

RATING SENSITIVITIES

Dunia's ratings are presently most sensitive to further deterioration in asset quality. Should credit losses mount to the point where high lending margins no longer provide adequate compensation, affecting Dunia's capitalisation and leverage, this would put pressure on Dunia's Long-Term IDR.

Upside potential for Dunia's ratings is limited in the near term in view of the recent negative trend in impairment. However, should this reverse, with the company at the same time maintaining a conservative balance sheet structure and continuing to diversify and lengthen its funding sources, the ratings could benefit over the longer term.