Fitch Ratings-London: Fitch Ratings has affirmed UAE-based Commercial Bank International's (CBI) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook and Viability Rating (VR) at 'b+'. A full list of rating actions is at the end of this rating action commentary.

CBI's IDRs, SR and SRF reflect a high probability of support available to the bank from the UAE authorities if needed. 

Fitch's view of support factors in the UAE authorities' strong capacity to support the banking system, sustained by sovereign wealth funds and recurring revenue mostly from hydrocarbon production. Fitch also expects a high willingness from the authorities to support the banking sector. This has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as the authorities' close ties with and part- government ownership links to a number of banks. 

CBI's SRF is two notches below the UAE Domestic Systemically Important Banks's (D-SIB) SRF 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-2018, and its niche corporate focus.

CBI's VR reflects the bank's limited franchise (market share below 1%), a less diversified business model than peers', weak and volatile asset quality metrics, low capital ratios in light of the bank's concentrated balance sheet, below-average profitability and high levels of unreserved impaired loans. 

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, improving liquidity, and the ordinary support, including liquidity support, the bank enjoys from its 40% and largest shareholder Qatar National Bank (QNB; A+/Stable/F1). However the previous benefits in its ability to participate with QNB in syndications and large transactions have diminished given regional tensions.

CBI's asset quality weakened in 2018 with the bank's impaired loans ratio (stage 3 under IFRS 9) rising to 9.4% at end-2018 from 7.8% at end-2017, well above the UAE average of 4.8%. Stage 2 loans accounted for a further 16.2% of gross loans, giving a problem loans ratio (stage 2 + stage 3 loans) of 26% at end-2018 and heightening CBI's asset quality metric vulnerability to migration of stage 2 loans into the stage 3 category. Loan loss coverage of impaired loans (40.7% at end-2018) remains well below the UAE peer average. Loan loss coverage of problem loans is very low at 16%. 

Earnings and profitability metrics have been variable and are well below peers' despite some improvements in 2018. Nevertheless better cost efficiency and higher non-interest income supported CBI's profitability metrics in 2018. 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 1.5% over the last four years. The bank's earnings and profitability metrics remain highly sensitive to loan impairment charges (LICs). As the balance sheet clean-up continues, we expect elevated LICs to keep eroding CBI's profitability over the medium term. 

We view CBI's capital ratios as weaker than other Fitch-rated UAE peers', with a Fitch Core Capital (FCC) ratio of only 10.9% at end-2018. The bank's capital ratios came under pressure in 2018 from IFRS 9 implementation despite muted loan growth and improved profitability. The bank's total capital adequacy ratio stood at 14.1% at end-2018 and management intends to keep it above 14.75%. However, we view CBI's capital position as highly vulnerable to further asset quality deterioration amid the balance sheet clean-up and the bank's high level of unreserved impaired loans (41% of FCC at end-2018). 

Fitch views CBI's funding profile as generally stable. Customer deposits are 62% corporate-related and have historically been stable. Single-depositor concentration is high with the 20- largest deposits accounting for 44.7% of the total at end-2018. CBI complements its deposit funding with a mix of interbank funding and perpetual additional Tier 1 securities, demonstrating reasonable access to capital markets as well as ordinary parental support from QNB.

CBI's liquidity position improved in 2018. The loans-to-deposits ratio fell to 88% at end-2018 from 95% at end-2017 on the back of strong deposit growth and subdued loan growth. CBI's stock of liquid assets (cash and balances with the central bank, short-term interbank placements and investment-grade debt securities) net of short-term non-customer deposit funding was equivalent to 22% of total customer deposits at end-2018, providing CBI with a good liquidity cushion. 

CBI's IDRs, SR and SRF 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 bank's underlying asset quality and capital ratios. A further deterioration in the bank's asset quality and/or capital position through the migration of stage 2 loans into the stage 3 category could be negative for the VR. 

The rating actions are as follows: 

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+'

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: 

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