Fitch Ratings-London-July 03: Fitch Ratings has affirmed UAE-based Commercial Bank International's (CBI) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook, and Short-Term IDR at 'F2', Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB+'. The Viability Rating (VR) has also been affirmed at 'b+'. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRs, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
CBI's IDRs, Support Rating and Support Rating Floor reflect the high probability of support available to the bank from the UAE authorities if needed.
Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and on-going revenue mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, and close ties with and part government ownership links to a number of banks.
CBI's Support Rating Floor is two notches below the UAE Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A', due to Fitch's view that CBI is less systematically important based on its less than 1% market share of total assets in the UAE banking system at end-2017, and its niche corporate focus.
CBI's VR reflects the bank's limited franchise, a less diversified business model than peers', weak but improving asset quality metrics and weak capital ratios in light of the bank's concentrated balance sheet and below-average profitability. The VR also takes into account the clean-up of CBI's balance sheet through the write-off of legacy impaired loans, acceptable management and strategy, tightened underwriting standards, albeit with a still limited track record, adequate liquidity, and the ordinary support, including liquidity support, the bank enjoys from its largest shareholder Qatar National Bank (QNB; A+/Stable/F1).
CBI's VR primarily reflects the bank's limited franchise (market share below 1%) and less diversified business model than peers'. It also considers ordinary support from the partnership with QNB, notably on liquidity as the ability to participate with QNB in syndications and large transactions has diminished, given the regional tensions.
CBI's asset quality is weak. The impaired loans ratio is above the UAE average of 5.1%, at 7.8% at end-2017, despite sizeable write-offs in addition to the bank's balance sheet clean-up in 2015. Reserves for impaired loans have remained well below UAE peers' with impaired loan coverage of 46.6% at end-2017. The implementation of IFRS 9 had a negligible impact on reserve coverage at end-1Q18. CBI's loan book remains concentrated, although this is a common characteristic for UAE, particularly with respect to legacy real estate assets.
CBI has weaker capital ratios (the Fitch Core Capital ratio was about 11% at end-2017) than Fitch-rated UAE banks. CBI's capital ratios have been under pressure as revenue generation has not kept up with high loan growth. CBI management intends to keep the total regulatory capital ratio above 14%. At end-2017, the Tier 1 regulatory ratio was 13.7%. The total regulatory capital ratio was 14.8%.
Earnings and profitability metrics have been variable and are well below peers'. Fitch's key earnings and profitability metric - operating profit/risk-weighted assets (RWAs) - demonstrates the variability of the bank's operating profitability, ranging from -2.9% to 1% over the last four years. Over the same period, UAE peers have demonstrated on average a stable 2.2% operating profit/RWAs. A combination of high loan impairment charges relative to operating profit, and an above-average cost-to-income ratio explains why CBI's overall profitability has remained, and is likely to remain, much below the industry average although this is dependent on management's ongoing actions to reduce the bank's cost base.
Fitch views CBI's funding profile as generally stable. Customer deposits are concentrated, although more than 60% are corporate-related, and have historically been stable. The 20 largest deposits accounted for 46.9% of the total at end-2017. CBI complements its deposit funding through a mix of short-term repurchase agreements and perpetual additional Tier 1 securities, demonstrating reasonable access to the capital markets as well as ordinary parental support from QNB respectively.
CBI has a sufficient stock of liquid assets (cash and cash equivalents, short-term interbank placement and liquid securities) equivalent to 15% of deposits, providing an adequate liquidity cushion. CBI's loans-to-deposits ratio is in line with peers'.
IDRs AND SUPPORT RATING
CBI's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE authorities and on their propensity to support the banking system or the bank. A higher market share and increased government ownership would also be positive.
Further evidence of CBI implementing its strategy, building its franchise, and growing its balance sheet with no material deterioration in the bank's risk indicators could contribute to an upgrade. Upside for the VR could also arise from improvements in the underlying asset quality and capital ratios.
The rating actions are as follows:
Commercial Bank International:
Long-Term IDR affirmed at 'BBB+'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
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