OREANDA-NEWS. Fitch Ratings has affirmed Union de Banques Arabes et Francaises' (UBAF) Long-term Issuer Default Rating (IDR) at 'BBB+' with Positive Outlook. At the same time, Fitch has downgraded UBAF's Viability Rating (VR) to 'bb' from 'bb+'. A full list of rating actions is available at the end of this rating action commentary.

The downgrade of UBAF's VR reflects Fitch's view that the continued difficult business environment in the Middle-East and North Africa (MENA), where UBAF generates a large part of its revenue, is affecting the bank's trade finance franchise. UBAF's revenue base has been shrinking and was insufficient to cover costs in 1H15. While UBAF is trying to expand in other business and geographical segments, we believe that it will take time for the bank's business model to generate satisfactory performance.

KEY RATING DRIVERS
IDRS AND SUPPORT RATING
UBAF's IDRs and Support Rating are driven by potential support from Credit Agricole Corporate and Investment Bank (CACIB, A/Positive; 47% shareholder), part of Credit Agricole (CA; A/Positive). Fitch believes that timely financial support would be provided by CACIB, or ultimately by CA, if required, as CACIB is UBAF's designated reference shareholder.

The two-notch difference between CACIB's and UBAF's Long-term IDRs reflects Fitch's opinion that UBAF is of limited importance to the parent. This considers UBAF's role and franchise and limited synergies with the group. This is counterbalanced by the high reputational risk for the parent if UBAF defaults as well as UBAF's small size, which would absorb limited resources of the parent in case of support. The Positive Outlook on UBAF's Long-term IDR mirrors those on CACIB and CA.

VR
UBAF's company profile constrains the VR given its monoline business focussed on trade finance in emerging markets. Because of continued political turmoil in some of UBAF's key markets in the MENA region, trade flows there have reduced substantially, and this has translated into weak profitability. UBAF's 101% cost-income ratio in 1H15 highlights the bank's challenge in generating higher revenue. UBAF's new management team's strategy is focussing on new markets and seeking to leverage against the bank's relationships with its shareholders, which is credit-positive. However, we consider execution risk in improving revenue as substantial because UBAF's franchise in targeted markets is small. In addition, we believe that UBAF has little cost flexibility given the bank's focus on improving risk controls.

UBAF's weak profitability is balanced by the bank's reduced risk appetite. UBAF has reduced or cut its exposure to higher-risk countries, and has ceased some businesses that are exposed to lower transparency (eg correspondent banking in certain jurisdictions). We also view UBAF's continued focus on improving its risk management framework as credit- positive. This includes closer integration with its parent bank in terms of systems and procedures, as well as the strengthening of the risk management department.

Similar to its trade finance peers, UBAF's main risks relate to operational and litigation issues. In May 2014, UBAF filled a Voluntary Self-Disclosure with US Office of Foreign Assets Control (OFAC) relating to certain transactions that might be construed as potentially impermissible under U.S. regulations. The outcome is hard to predict but UBAF's VR is based on the assumption that the settlement costs will be manageable for the bank. Material settlement costs leading to a sharp decline in capital ratios, with no credible plan to restore these over a reasonably short period, or constraints on business from regulators as part of the settlement, would put the rating under pressure. UBAF's capital ratios are sound and compare adequately with peers, but its capital base is small in absolute terms and therefore unlikely to absorb material shocks.

UBAF's funding base is almost exclusively wholesale-based and is concentrated. Nonetheless, we view liquidity as satisfactory given the short-term nature of UBAF's trade finance transactions. Liquidity is further underpinned by potential support from its parent bank, although UBAF does not rely on funding from CACIB.

UBAF's trade finance transactions are mainly short-term and typically collateralised by goods or guarantees. The bank's sound underwriting standards have translated into satisfactory asset quality. Nonetheless, UBAF remains sensitive to event risk from high asset and geographic concentrations.

RATING SENSITIVITIES
IDRS AND SUPPORT RATING
UBAF's IDRs and Support Rating are sensitive to a change in CACIB's, and ultimately CA's IDRs. The ratings are also sensitive to a change in Fitch's view of UBAF's links to CACIB and could be negatively affected if these weaken, for example by a sale of or material reduction in the ownership stake.

VR
The bank's VR could be downgraded if UBAF is unable to restore at least acceptable underlying profitability, which would signal a further weakening of its franchise. Sizeable operational losses with no credible plan for restoring capitalisation would also put the VR under pressure. A shift toward a higher risk appetite, greater asset concentration, less stringent liquidity policies or looser operational and credit risk controls could also trigger a downgrade, although this is not our expectation.

Upside potential for the VR is limited given the narrow business model and the expected prolonged challenging operating environment in the MENA region. An upgrade would be contingent on a material improvement in revenue generation, leading to satisfactory profitability, while maintaining sound risk appetite.

The rating actions are as follows:

UBAF
Long-term IDR: affirmed at 'BBB+'; Outlook Positive
Short-term IDR: affirmed at 'F2'
Support Rating: affirmed at '2'
Viability Rating: downgraded to 'bb' from 'bb+'.