Outlook Stable

Fitch Ratings-London/Dubai-18 April 2012: Fitch Ratings has affirmed Sharjah Islamic Bank's (SIB) Long-term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook and Viability Rating (VR) at 'bb'. A full list of ratings is at the end of this comment.

SIB IDRs, Support Rating and Support Rating Floor reflect Fitch's opinion that there is a high probability of external support from the UAE authorities, if needed. The Support Ratings consider the authorities record of support for the UAE banking system.

The VR reflects the bank's strong capital ratios, steady profitability and good funding profile. The VR also considers SIB's stressed asset quality as well as balance sheet concentrations, high amount of related party lending and limited franchise.

A change in Fitch's view of the willingness or ability of the UAE authorities to provide sovereign support for SIB could result in a change of the bank's IDRs and Support Rating. However, Fitch notes the strong history of support in the UAE for the banking system.

Fitch views an improvement in the VR as unlikely in light of the high financing book concentrations and stressed asset quality and limited franchise. A severe deterioration in capital or asset quality could lead to a downgrade of the VR.

SIB has the highest capital ratios of all Fitch-rated UAE banks. The bank's robust capital position provides it with significant capacity to absorb potential impairment charges and asset quality problems. It also provides the bank with good capacity for growth. However, the concentrated nature of the bank's financing book exposes SIB to concentration risk.

SIB's NPLs increased to 3.7% of gross financing which still compares well with peers. However, the high level of renegotiated financing and rise in past due but not impaired may be an indication of further asset quality problems as many overleveraged borrowers struggled with repayments in a stressed property and operating environment. SIB's financing book is concentrated, which heightens event risk, as does the large amount of related party financing which is largely to the Sharjah government.

Although the bank's net income declined 5.7% yoy to AED251m, it has remained relatively stable since 2008 despite the stressed UAE operating environment. Net income is expected to remain stable and may benefit from SIB's increased financing volumes. SIB's cost/income ratio is high compared to UAE peers and regional norms and may indicate some inefficiency.

SIB is well funded by stable customer deposits, which accounted for a high 81% of 2011 total funding. The bank also successfully issued sukuk in May 2011 which helped extend the bank's funding maturity profile. Customer deposits exhibit concentrations, although historically these deposits have proven stable.

The bank's liquidity position is acceptable and includes cash and balances with the CBUAE and interbank placements as well as a small portfolio of liquid assets equivalent to 32% of end-2011 customer deposits. The bank's financing to deposit ratio increased to 103.7% at end-2011 as financing increased 9.9% yoy.

Established in 1975 as a conventional bank (previously known as National Bank of Sharjah), SIB converted into an Islamic bank in 2002. The government of Sharjah currently holds 31.3% of the bank's shares (through two registered shareholdings of 27.4% and 3.9%) and has been a major shareholder since it was established. Kuwait Finance House (KFH) joined as a strategic investor (20%) upon conversion although it has limited involvement in SIB's activities. The remaining shares are listed on the Abu Dhabi Securities Exchange.

The rating actions are as follows:

Sharjah Islamic Bank

Long-Term IDR affirmed at 'BBB+' with a Stable Outlook;

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 II Limited

Senior unsecured debt affirmed at 'BBB+'

Contact:
Primary Analyst
Alan Milne
Analyst
+44 20 3530 1491
Fitch Ratings Limited
30 North Colonnade
London E14 5GN

Secondary Analyst
Mahin Dissanayake
Director
+971 4 408 1806
Committee Chairperson
Eric Dupont
Senior Director
+33 1 4429 9131

Media Relations: Michelle James, London, Tel: +44 0203 530 1574, Email: Michelle.James@fitchratings.com.

© Press Release 2012