Fitch Ratings-London/Dubai/Paris-28 September 2015: Fitch Ratings has assigned Dubai-based Emirates Islamic Bank PJSC (EI) a Long-term foreign currency Issuer Default Rating (IDR) of 'A+' and a Viability Rating (VR) of 'bb-'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS: IDRS AND SUPPORT RATING
EI's IDRs and Support Rating reflect Fitch's view that EI is a key and integral subsidiary of its 99.85% 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 very 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.
KEY RATING DRIVERS: VR
EI's VR reflects the bank's weak asset quality and, to a lesser extent, capital ratios being below the average of UAE peers. The VR also considers EI's adequate liquidity, growing customer base, improving profitability and diversified revenue streams.
EI is currently the third-largest Islamic bank in the UAE in terms of assets (1.9% market share of total banking system assets at end-2014) following the acquisition of the portfolio of Dubai Bank in 2012. EI has a strong and growing customer base and domestic franchise and has the third-largest Islamic branch network in the UAE. EI is diversifying its balance sheet through its focus on retail and SME financing; however, the financing book remains concentrated by single-name exposures, particularly real estate exposures mainly from legacy lending (the top 20 exposures represented 140% of total equity at end-2014).
EI's asset quality metrics are on an improving trend. The bank's impaired financing ratio improved to 10.3% at end-2014 (16.5% at end-2013), mainly due to write offs and a growing financing book. The bank has been building its reserve coverage, which reached 90% at end-2014 (from 52% at end-2011), versus its target of 100%. Fitch expects EI's asset quality metrics to improve further as the bank finalises its balance sheet clean-up, particularly with the expected resolution of some of its largest impaired financing in 2016.
EI's profitability has been strengthening as the balance sheet grew. Net income grew 147% in 2014, supported by higher core revenues and lower funding costs. Loan impairment charges have been increasing since 2012 (absorbing 69% of pre-impairment profit in 2014) as the bank has been building its reserve coverage. This is expected to drop as EI continues to strengthen its operating profit and reaches its targeted reserve coverage.
At end-2014, the Fitch Core Capital ratio stood at 12.7%, which is lower than the UAE banks' average and is considered weak given the bank's underlying asset quality, problem financing and fairly high financing concentration, although concentration is lower than peers. In recent years, EI has not repatriated dividends to its parent and Fitch believes that the bank can raise capital from ENBD if needed.
EI is mainly funded by customer deposits, which accounted for 86% of non-equity funding at end-2014. Given the bank's retail focus, its deposit base is less concentrated than other local peers. EI continues to increase the proportion of current and saving accounts in its deposit base to reduce funding costs. Similar to local peers, EI runs negative liquidity gaps as 57% of its total deposits mature within one year. EI holds an adequate stock of liquid assets including cash balances, interbank placements and investment securities, which covered 45% of total customer deposits at end-2014. The bank aims to improve its liquidity profile by further accessing the capital markets to diversify its funding and reduce its asset-liability mismatches.
RATING SENSITIVITIES
IDRs AND SUPPORT RATINGS
EI's IDRs and Support Rating are sensitive to a change in ENBD's IDRs. Unless its importance to ENBD diminishes, EI's IDRs will continue to be equalised with ENBD's. 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 and Dubai authorities' ability or propensity to provide support.
RATING SENSITIVITIES - VR
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 there is any material deterioration in asset quality further impacting the bank's capital ratios, loss absorption capacity and profitability.
The rating actions are as follows:
Long-term IDR assigned at 'A+'; Outlook Stable
Short-term IDR assigned at 'F1'
Viability rating assigned at 'bb-'
Support Rating assigned at '1'
Contact:
Primary Analyst
Redmond Ramsdale
Director
+971 4 424 1202
Fitch Ratings Limited
Al Thuraya Tower 1, Office 1805 & 1806, Dubai Media City,
Dubai, United Arab Emirates
PO Box 502030
Secondary Analyst
Zeinab Abdalla
Analyst
+971 4 424 1210
Committee Chairperson
Eric Dupont
Senior Director
+ 33 1 44 29 91 31
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Global Bank Rating Criteria (pub. 20 Mar 2015)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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