Fitch Ratings-Paris/London-June 21: Fitch Ratings has affirmed UAE-based Commercial Bank of Dubai's (CBD) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook and Viability Rating (VR) at 'bb+'. 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)
CBD's IDRs, SR and SRF reflect the extremely 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 revenues mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector relative to the country's GDP. Fitch also expects 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 close ties and part government ownership links of a number of banks.
CBD's SRF is one notch below the UAE Domestic Systemically Important Banks' (D-SIB) SRF of 'A' due to Fitch's view that CBD is less systemically important. This is based on CBD's small market share (only 2.6% and 3.4% of total assets and deposits in the UAE, respectively, at end-2017) and niche corporate focus.
SPV AND SENIOR DEBT
The ratings of the senior unsecured notes issued by CBD's special purpose vehicle (SPV), CBD (Cayman) Limited, are in line with the parent's Long- and Short-Term IDRs because Fitch views the likelihood of default on any senior unsecured obligation issued by the SPV the same as the likelihood of default of the bank.
VR
CBD's VR reflects its high problem loans ratio, small niche franchise and high reliance on wholesale funding, as well as profitability and capital ratios below peers. It also considers adequate management and strategy as well as satisfactory reserve coverage.
CBD has a niche franchise, with a well-entrenched corporate banking franchise but limited diversification into retail banking, SME finance and Islamic banking. CBD's market share limits its pricing power.
CBD's VR is constrained by the bank's weak asset quality. Impaired loans and problem loans ratios (which includes impaired loans + restructured loans + 90 days past due but not impaired loans) are high, despite continued improvement. Generation of problem loans was elevated in 2017, notably due to increasingly conservative loan classification, and asset quality metrics may be sensitive to lower anticipated growth. Reserves for impaired loans remain high, covering 91% of impaired loans (6.8% of gross loans) at end-1Q18. Fitch believes this is necessary in light of the bank's loan book concentrations. CBD's sizeable loan concentrations, although a common characteristic for UAE banks, also constrain the VR.
Concentrations on both sides of the balance sheet make CBD's capital sensitive to local event risk. CBD's capital metrics have steadily declined due to high balance sheet growth, falling profitability relative to equity and the payment of a regular dividend. As a result, CBD's capital ratios have gone from being in line with local peers to below. CBD's total regulatory capital ratio was 15% at end-2017, compared with the UAE banking sector average of 18.7%. The bank's management intend to maintain current capital levels through lower growth and a more flexible dividend pay-out policy.
Fitch views CBD's funding profile as generally stable. Despite funding concentrations, the deposit base is slightly weighted towards term deposits and provides a generally stable funding base for the short to medium term. Nonetheless, in the absence of a well-established retail franchise, CBD's cost of funding will remain sensitive to rising interest rates. CBD complements its deposit funding with an issue under its EMTN programme, medium-term repurchase agreements and a syndicated loan, demonstrating good access to capital markets when required.
CBD has a large stock of liquid assets (cash and cash equivalents, short-term interbank placement and liquid securities) equivalent to 28% of customer deposits, providing a good liquidity cushion. CBD's gross loans to deposits ratio remains above peers, indicative of the bank's relatively more diversified funding profile.
Earnings and profitability metrics have been declining and are now below peers. Fitch's key earnings and profitability metric, operating profit/risk weighted assets, deteriorated to 1.7% in 2017 from 2.8% in 2014. This resulted from a narrowing net interest margin (attributable to an increase in the cost of funding) and rising loan impairment charges.
RATING SENSITIVITIES
IDRs, SR, SRF AND SENIOR DEBT
CBD's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE authorities on their propensity to support the banking system or the bank.
The senior unsecured note issued under CBD's euro medium-term notes programme via CBD (Cayman) Limited is rated in line CBD's IDRs and its ratings are therefore subject to the same sensitivities.
VR
A downgrade of the VR could result from significant deterioration in asset quality leading to weaker capital ratios. An upgrade may result from further diversification of the franchise and a sustained improvement in asset quality and cost of funding.
The rating actions are as follows:
Commercial Bank of Dubai P.S.C:
Long-Term IDR affirmed at 'A-'; Outlook Stable
Short-Term IDR affirmed at 'F2'
VR affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A-'
Senior unsecured notes affirmed at 'A-'/'F2'
CBD (Cayman) Limited:
Senior unsecured note affirmed at 'A-'/'F2'
Contact:
Primary Analyst
Eric Dupont
Senior Director
+33 144 29 91 31
Fitch France S.A
60 Rue de Monceau
75008 Paris
Secondary Analyst
Mark Cordwell, CFA
Associate Director
+44 20 3530 1644
Committee Chairperson
Mahin Dissanayake
Senior Director
+44 20 3530 1618
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 23 Mar 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
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