Fitch upgrades Al Hilal Bank, affirms 8 others’ ratings

International ratings agency Fitch on Thursday upgraded Al Hilal Bank and affirmed 8 other banks and one non-bank financial institution rating.

Fitch said it had upgraded Al Hilal Bank's (AHB) Viability Rating (VR) and affirmed the VRs of the other seven banks and all other ratings.

The affirmation of the banks' Long-Term IDRs, Support Ratings and Support Rating Floors, reflects the extremely high probability of support available from the UAE authorities, and governments of Abu Dhabi (AA/Stable/F1+) and Dubai, if required.

Abu Dhabi Islamic Bank, Al Hilal Bank, Dubai Islamic Bank, Mashreqbank, Commercial Bank of Dubai, RakBank, Sharjah Islamic Bank, Bank of Sharjah and Dunia have been rated in the report.

Fitch's opinion of support is based on the ability and willingness of the authorities to support the banking sector, which has been demonstrated by UAE authorities' long track record of supporting domestic banks, as well close ties and ownership links with the government at a number of banks. Fitch's view of support also considers the sovereign's strong capacity to support the banking system, sustained by its sovereign wealth funds and on-going revenues, mostly from its hydrocarbon production, and the moderate size of the UAE banking sector in relation to the country's GDP.

Five of the banks - Abu Dhabi Islamic Bank (Adib), AHB, Commercial Bank of Dubai (CBD), Dubai Islamic Bank (DIB), and Mashreqbank - 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, systemic importance.

Fitch considered all the banks to be domestic systemically important financial institutions (D-SIFI) based on Fitch's view of each bank's systemic importance relative to other banks in the banking system, and considering, amongst 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' D-SIFI Support Rating Floor of 'A+', reflecting their high systemic importance. Abu Dhabi banks' D-SIFI 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-SIFI Support Rating Floor of 'A', reflecting their D-SIFI status in the UAE and Dubai, in particular. CBD's Support Rating Floor is one notch below the UAE D-SIFI Support Rating Floor due to Fitch's view that it is less systemically important based on its smaller size and market share, and niche franchise, compared with DIB and Mashreq. The Support Rating Floors for the remaining three banks are 'BBB+', two notches below the UAE D-SIFI Support Rating Floor, reflecting Fitch's view of their lower relative systemic importance, due to smaller market shares and franchises.

The Adib, AHB, DIB, Tamweel and SIB Sukuk Company Ltd trust certificate issuance programmes, Rakfunding Cayman Ltd, and the senior unsecured notes issued under these entities are rated in line with their respective banks' IDRs and are therefore subject to the same rating drivers.

Rating sensitivities

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 considered 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, Tamweel and SIB Sukuk Company Ltd trust certificate issuance programmes, Rakfunding Cayman Ltd, and the senior unsecured notes issued by these entities, are subject to the same sensitivities.

Rating drivers

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, high oil prices and an expanding non-oil private sector, particularly in Dubai. The banks all benefit from an improving operating environment, sound liquidity, capital ratios, and pre-impairment operating profit levels, which are able to absorb high credit costs, if necessary.

Asset quality issues remain in Dubai, largely relating to the poor performance of the real estate sector during the crisis and some large Dubai government-related entity (GRE) problem loans. High loan and deposit concentration is a constraint on the VRs, but where exposure is directly to the Abu Dhabi government Fitch considers it as less unfavourable.

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 reflects the bank's underlying weak asset quality and core capitalisation, high related party exposure and loan book concentration. The rating also considers the bank's strong and resilient franchise, its capacity to absorb higher losses through robust pre-impairment operating profit, and sound balance-sheet liquidity. The VR also takes into account some risks related to transparency of information.

Fitch believes that Adib’s VR remains sensitive to any deterioration in asset quality, capital or profitability. Further reductions in core capital ratios could be negative for the rating, particularly in light of the slow unwinding of legacy assets.

A significant and sustained improvement in asset quality as well as an increase in capital ratios could lead to an improvement in Adib's VR, although Fitch sees this as unlikely in the short term.

Al Hilal Bank (AHB)

The upgrade of AHB's VR reflects its growing franchise, extra year of track record, improving profitability, continued healthy asset quality, strong reserve coverage and satisfactory capitalisation.

AHB's VR reflects its small but growing franchise, limited track record, and high concentrations in both the financing book and customer deposit base. The VR also considers Al Hilal's improving profitability, generally healthy asset quality, strong reserve coverage and satisfactory capitalisation.

Further evidence of implementing its strategy and continuing to build its track record with no material deterioration in the bank's risk indicators could be a positive rating driver. Downside risk could arise if the strong growth in financing were to lead to a material deterioration in asset quality, impacting the bank's profitability and capitalisation.

Dubai Islamic Bank (DIB)

DIB's VR reflects the bank's underlying weak asset quality, exposure to problem financing, sizeable loan concentrations and renegotiated loan book, and consequent vulnerability to event risk and potentially high losses.

The rating continues to be underpinned by the bank's strong domestic franchise, comfortable liquidity and funding, predominantly due to its large and stable deposit base and high proportion of liquid assets, and by its adequate capacity to absorb losses through robust pre-impairment operating profit.

Fitch believes that DIB's VR remains sensitive to any deterioration in asset quality that affects the bank's capital or profitability. Further significant and sustained improvement in asset quality could lead to an upgrade of DIB's VR.

Mashreq

Mashreq's VR reflects the bank's underlying weak asset quality, and consequent vulnerability to event risk and potentially high losses, through sizeable loan concentrations and renegotiated loan book, particularly to GRE exposures. It also reflects corporate governance risks regarding the board composition.

The rating continues to be underpinned by the bank's strong and resilient franchise, its capacity to absorb higher losses, through diversified recurring earnings and capital, and comfortable liquidity position primarily due to its large and stable deposit base.

Fitch believes that Mashreq's VR remains sensitive to any deterioration in asset quality, particularly regarding the repayment of the large GRE loans, which have the potential to result in a sharp increase in impairment charges and affect the bank's capitalisation.

The effect of continued high loan growth is a potential concern for capital levels. Given the high, albeit decreasing, loan concentrations and legal cases following the defaults by troubled Saudi corporates, the VR is also sensitive to event risk.

An upgrade would require further improvement in asset quality and a track record of repayment of restructured loans.

 Commercial Bank of Dubai (CBD)

CBD's VR reflects the bank's solid capitalisation and consistent profitability levels in recent years during challenging market conditions. The key constraints are the bank's high NPL ratio and reserve coverage, particularly when also considering the bank's other problematic loans (loans past due over 90 days but not impaired and restructured loans). CBD's small niche franchise and the risks of operating largely in Dubai are also a constraint, albeit to a lesser extent.

A downgrade of CBD's VR would be likely if NPLs continue to rise or worsen beyond Fitch's expectations. Capital is likely to remain solid, but an upgrade of the VR would require significant and sustained improvement in asset quality, although Fitch sees this as unlikely in the near term.

 RakBank

RakBank’s VR is constrained by its fairly small franchise (2% of UAE banking assets), rising credit risk exposure due to its expansion in unsecured SME lending (RAKFIN) and pressure on liquidity from a wide asset-liability maturity mismatch. The rating also reflects strong profitability and performance metrics throughout the global financial crisis and the subsequent downturn in the UAE economy.

Fitch also considers RakBank’s leading retail business, high revenue generation capability, and healthy capitalisation. Balance sheet liquidity is supported by a large stable customer deposit base and holdings of liquid assets.

RakBank’s VR could be negatively affected if the bank's expansion in unsecured SME lending leads to a sharp rise in NPLs or problem loans (restructured loans and past due loans). However, risks to asset quality are counterbalanced in the interim by its strong capital position. Any worsening in the bank's asset-liability maturity mismatch could also lead to a downgrade. The rating could be upgraded if the bank fully addresses its issues in funding and liquidity and further diversifies its business profile.

 Sharjah Islamic Bank (SIB)

SIB's VR reflects constraints from its modest franchise, high lending concentrations, and some risks over large related-party exposures. However, it also factors in SIB's strong capital ratios, resilient profitability and sound funding profile.

Upside potential to SIB's VR is somewhat limited, given the bank's concentrated financing portfolio and fairly small franchise within the UAE banking sector. Downside risk to SIB's VR could arise from deterioration in asset quality affecting the bank's profitability and eroding capital beyond a comfortable level, especially considering the high proportion of capital invested in real estate.

 Bank of Sharjah (BoS)

BoS's VR reflects the bank's small franchise, high lending concentrations, weak, but improving asset quality, and some risks over related-party loans and investments, which are common in the region. The VR also considers BoS's satisfactory capitalisation and healthy liquidity.

Upside potential to BoS's VR is somewhat limited, given the bank's asset quality indicators. The VR could be downgraded if negative asset quality trends, including past due loans and restructured loans, impact the bank's profitability and capital position.

Dunia

Dunia is a non-bank financial institution and the ratings do not factor in any state or institution support. Its IDRs reflect strong loan growth, a track record of six years and dependence on rate-sensitive concentrated corporate deposits. They also consider Dunia's strong current capital ratios, strong profitability, solid financials and prospects and capable management.

Funding structure diversification and more liquid assets on balance could be rating positive, while failure to renew committed credit line from the bank could result in a downgrade. The ratings could be also downgraded if credit losses increase and have not been compensated by higher margins resulting in profitability and potentially capitalisation drop.

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