ADIB's IDRs, SR and SRF reflect an extremely high probability of support available to the bank from the UAE and Abu Dhabi 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 recurring revenue mostly from hydrocarbon production. 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 with and part government ownership links to a number of banks.
ADIB's SRF is at the Abu Dhabi Domestic Systemically Important Banks' (D-SIB) SRF of 'A+', reflecting the bank's high systemic importance. ADIB enjoys a 5% share of total system assets. Abu Dhabi banks' D-SIB SRF is one notch higher than other UAE banks', due to Abu Dhabi's superior financial flexibility.
SPV AND SENIOR DEBT
The ratings of senior unsecured debt (sukuk) issued by ADIB's special purpose vehicle (SPV), ADIB Sukuk Company are in line with the bank'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.
The Viability Rating (VR) of ADIB reflects its weak asset quality, low coverage of impaired financing, sizeable balance sheet concentrations, weak - albeit improved - core capitalisation and high related-party lending. The VR also takes into account the bank's strong and resilient UAE-wide franchise, especially in Islamic retail banking, as well as strong profitability, sound liquidity and stable funding.
Despite lower growth, ADIB has maintained its 5% share of UAE banking sector assets and customer financing. ADIB is the second-largest UAE Islamic bank (behind Dubai Islamic Bank) and the fourth-largest Islamic bank globally by total assets. The bank's solid deposit franchise supports the VR.
ADIB's UAE-wide franchise is a strength for the bank's funding and liquidity. Customer deposits accounted for 92% of the bank's total funding base at end-2018, including 69% of low-cost deposits, which have proven stable. Net liquid assets cover 17% of total assets and 21% of total deposits. The 20-largest deposits represented 19% of the total at end-2018, which is below concentration levels seen at other UAE banks.
ADIB's asset quality remains weak. At end-2018, ADIB reported an impaired financing ratio of 4.8%, in line with the banking sector average. Impaired financing is concentrated on the bank's real estate and international financing portfolios. While impaired financing levels are acceptable, the total potential problem financing ratio, which includes stage 2 financing, is much higher, at 14.8% at end-2018. The bulk of stage 2 financings are restructured financings, mostly legacy exposures. The coverage of impaired financing (73%) was below medium-sized peers' average (100%) at end-2018 and unreserved impaired financing represented 8% of equity.
Related-party financing accounted for a high 47% of equity at end-2018. This mostly relates to exposure to ADIB's controlling shareholder and also translates into high financing concentration. The top 20 exposures make up 20% of total gross financing, albeit still lower than most UAE peers'.
ADIB's core capital improved following an AED1 billion rights issue in October 2018, which followed the bank's first rights issue of AED504 million in August 2015. The FCC ratio increased to 12.8% at end-2018 from 10.9% at end-2017, which Fitch views as sufficient for the bank's current moderate growth plans. However ADIB's FCC ratio remains below the sector average. The bank is compliant with the 9.5% minimum fully loaded (from 1 January 2019) regulatory CET1 ratio in the UAE. ADIB's Total Capital Adequacy Ratio (CAR) and Tier 1 ratio are now in line with the peers' average.
Performance remained strong in 2018 but equity-based return ratios were down slightly due to the increased capital base. ADIB's strong retail franchise provides a lower cost of funding than peers', which supports a higher net financing margin (NFM). Revenue diversification is limited given ADIB's focus on local Islamic banking without any other large source of revenue. ADIB's cost-to-income ratio is significantly above the UAE average due to its large branch network relative to the bank's size, although this network benefits the bank's NFM. Financing impairment charges have remained low but could increase in 2019 if ADIB increases the provisioning level on its problem financing book, which is currently low.
In assessing ADIB's ratings, we consider important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications.
ENVIRONMENT, SOCIAL AND GOVERNANCE SCORES
All Islamic banks need to ensure compliance of their entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a governance structure relevance score of '4' (in contrast to a typical relevance influence score of '3' for comparable conventional banks). In addition, ADIB's governance structure relevance score of '4' reflects the bank's high related- party lending.
IDRS, SR AND SRF
ADIB's IDRs, SR and SRF are sensitive to a change in Fitch's view of the creditworthiness of the UAE and Abu Dhabi authorities and on their propensity to support the banking system or the bank.
SPV AND SENIOR DEBT
The ratings of senior debt issued by the SPV are sensitive to changes in the bank's IDRs.
Pressure on ADIB's VR could result from deterioration in asset quality or core capital ratios, particularly concerning the recovery of legacy exposures. A sustained improvement in asset quality and capital ratios could lead to an upgrade of the VR.
The rating actions are as follows:
Abu Dhabi Islamic Bank
Long-Term IDR affirmed at 'A+'; Outlook Stable
Short-Term IDR affirmed at 'F1'
Viability Rating affirmed at 'bb'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A+'
ADIB Sukuk Company Ltd:
Trust certificate issuance programme affirmed at 'A+'/'F1'
Under Fitch's Global Bank Rating Criteria, Fitch's SRFs are based on the ability and propensity of the government to provide support. Within the UAE, Fitch assesses the potential for support at federal level as Fitch believes that support would be forthcoming from the UAE authorities acting together. However, in respect of Abu Dhabi, Fitch has varied the criteria to reflect the superior financial flexibility of the Abu Dhabi authorities. As such, the SRFs for banks in Abu Dhabi are based on Fitch's assessment of the ability and propensity of the Abu Dhabi authorities to provide support in its own right. This results in a one notch higher SRF for Abu Dhabi banks (compared with other UAE banks), and results in a one notch higher rating for the bank.
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Additional information is available on
Bank Rating Criteria (pub. 12 Oct 2018)
Short-Term Ratings Criteria (pub. 02 May 2019)
Sukuk Rating Criteria (pub. 25 Jul 2018)
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