SIB's IDRs, SR and SRF reflect a high probability of support available to thebank from the UAE authorities if needed.
Fitch's view of support factors in the sovereign's strong ability to supportthe banking system, sustained by sovereign wealth funds and recurring revenue,mostly from hydrocarbon production, despite lower oil prices. Fitch alsoexpects high willingness from the authorities to support the banking sector,which has been demonstrated by the UAE authorities' long track record ofsupporting domestic banks, and is also underlined by partial governmentownership of some banks.
SIB's SRF is two notches below the UAE Domestic Systemically Important Banks'(D-SIB) SRF of 'A', reflecting Fitch's view that SIB is of moderate systemicimportance based on its approximate 1.5% market share of total assets in theUAE banking sector at end-2019.
SIB's Short-Term IDR of 'F2' is the lower of the two options corresponding toa 'BBB+' Long-Term IDR as described in our rating criteria. This is because asignificant proportion of UAE banking sector funding is related to thegovernment and stress on banks would likely come at a time when the sovereignitself is experiencing some form of stress. Fitch judges this "wrong-way" riskas high in the UAE, and this is reflected in the choice of Short-Term IDR,which primarily reflects SIB's liquidity and funding profile.
SPV AND SENIOR DEBT
The rating of the senior unsecured notes issued under the bank's trustcertificate issuance programme through SPV SIB Sukuk Company III Limited(100%-owned subsidiary) is in line with the bank's Long-Term IDRs becauseFitch views the likelihood of default on senior unsecured obligations issuedby the SPV as being the same as that of the bank.
VR
SIB's VR reflects the bank's modest franchise, satisfactory asset-qualitymetrics, only adequate capital ratios given high concentrations on both sidesof the balance sheet and below peers' profitability. It also reflectsacceptable management and strategy, a fairly conservative risk appetite, andsound funding and liquidity.
The VR remains constrained by the bank's modest franchise, although SIBbenefits from its close ties to the Sharjah government. SIB's market share isapproximately 1.5% of both UAE banking-system assets and deposits, whichlimits the bank's pricing power and competitive advantage.
SIB's financing book is characterised by high obligor and sectorconcentrations, exposing the bank to event risk. Related-party financing islarge, although predominantly to the Sharjah government and related governmentprojects, particularly infrastructure. The stage 3 financing ratio declined to4.9% at end-1Q20 from 5.5% at end-2018, supported by write-offs and financinggrowth, which compares favourably with domestic peers'. Accordingly, financingloss coverage of stage 3 financing declined to 78% at end-1Q20 from 104% atend-2019.
Stage 2 financing represented a further 6% of gross financing at end-1Q20 andis concentrated in the real-estate and services sectors. The total potentialproblem financing ratio (which includes stage 2 and stage 3 financing) was10.9% at end-1Q20, although total reserve coverage was satisfactory at 35%. Weexpect problem financing to increase over our 18-to-24 month rating horizongiven the weaker economic and business environment driven by the COVID-19outbreak and lower oil prices.
Measures announced in March 2020 allowing a broad range of customers to defertheir financing servicing commitments and encouraging banks to restructurefinancing where necessary will slow the need to recognise impaired financingin the near-term. However, borrowers' ability to recover and maintain orresume debt servicing payments will depend, to a large extent, on the durationof lockdown measures in the UAE, travel restrictions and global economictrends.
Earnings and profitability metrics had been improving prior to the COVID-19outbreak, but remained below domestic peers'. SIB's profitability metricsimproved in 2019, supported by higher net financing margins (NFMs), non-profitrevenues and declining operating expenses. However, a combination oflower-risk, lower-yielding assets and comparatively weak cost efficiencyexplains SIB's below-average overall profitability, which we expect topersist. Weaker asset-quality metrics, resulting in higher financingimpairment charges (FICs), and lower business volumes will further weigh onprofitability metrics.
SIB's capital ratios have fallen in recent years from previously high levels.The bank's Common Equity Tier 1 (CET1) ratio, our core capital metric, fell to14.9% at end-1Q20 from 20.4% at end-2016. This was driven by a combination ofregulatory changes (Basel III transition and IFRS 9 implementation) and highfinancing growth. SIB's total capital adequacy ratio (CAR) improved to 21.1%at end-1Q20 from 17.8% at end-2018 following a USD500 million (AED1.8 billion)additional tier 1 (AT1) sukuk issuance in 2019. As a result, SIB's regulatorycapital ratios remain well above minimum regulatory requirements, althoughFitch views these as only adequate in light of the bank's concentrated balancesheet and modest internal capital generation.
SIB is largely funded by stable customer deposits, which accounted for about74% of total non-equity funding at end-1Q20. Customer deposits areconcentrated but have historically been stable; 37% are from sovereign andgovernment-related entities. SIB complements its deposit funding with sukukissuance and has demonstrated good access to capital markets when required.
SIB's financing/customer deposits ratio improved to 93% at end-1Q20 from 103%at end-2017 but remains high relative to peers' which is indicative of a morediversified funding profile than some peers'. SIB maintains a reasonablecushion of net liquid assets (cash and cash equivalents, net short-terminterbank placements and liquid securities), which represented 12% of totalassets and covered 21% of customer deposits at end-2019.
In assessing SIB's ratings, Fitch considers important differences betweenIslamic and conventional banks. These factors include closer analysis ofregulatory oversight, disclosure, accounting standards and corporategovernance, as applicable. An Islamic bank's ratings do not express an opinionon the bank's compliance with sharia. Fitch will assess non-compliance withsharia if it has credit implications.RATING SENSITIVITIESFactors that could, individually or collectively, lead to negative ratingaction/downgrade:
-SIB's IDRs, SR and SRF are sensitive to a change in Fitch's view of thecreditworthiness of the UAE authorities and on their propensity to support thebanking system or the bank. A negative reassessment of sovereigncreditworthiness would trigger a negative rating action on the bank's IDRs.
-Pressure on SIB's VR could result from deterioration in asset quality,especially increasing stage 2 and stage 3 financing as a share of grossfinancing if this affects the bank's profitability and leads to an erosion ofthe bank's core capital ratios.
Factors that could, individually or collectively, lead to positive ratingaction/upgrade:
-Given our existing view of the high creditworthiness of the UAE and highpropensity to support the banking system and the bank, a positive ratingaction on the bank's Long-Term IDR is unlikely. However, a significantlyhigher market share could be positive for the ratings if this strengthens ourview of the bank's systemic importance in the UAE.
-An expansion in the bank's domestic franchise and/or a sustained improvementin the bank's asset quality and profitability metrics could lead to an upgradeof the VR but this is unlikely in the short-term.
The rating of the senior unsecured notes issued under the bank's trustcertificate issuance programme through SPV SIB Sukuk Company III Limited issubject to the same sensitivities as the bank's IDRs.Best/Worst Case Rating ScenarioInternational scale credit ratings of Financial Institutions issuers have abest-case rating upgrade scenario (defined as the 99th percentile of ratingtransitions, measured in a positive direction) of three notches over athree-year rating horizon; and a worst-case rating downgrade scenario (definedas the 99th percentile of rating transitions, measured in a negativedirection) of four notches over three years. The complete span of best- andworst-case scenario credit ratings for all rating categories ranges from 'AAA'to 'D'. Best- and worst-case scenario credit ratings are based on historicalperformance. For more information about the methodology used to determinesector-specific best- and worst-case scenario credit ratings, visit
Except for the matters discussed above, the highest level of ESG creditrelevance, if present, is a score of 3. This means ESG issues arecredit-neutral or have only a minimal credit impact on the entity(ies), eitherdue to their nature or to the way in which they are being managed by theentity(ies). For more information on Fitch's ESG Relevance Scores, visit
Contacts:Primary Rating AnalystMahin Dissanayake,Senior Director+44 20 3530 1618Fitch Ratings Ltd30 North Colonnade, Canary WharfLondon E14 5GN
Secondary Rating AnalystJamal El Mellali,Associate Director+44 20 3530 1969
Committee ChairpersonJames Watson,Managing Director+7 495 956 6657
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email:louisa.williams@thefitchgroup.comAmmaarah Hafezi, London, Tel: +44 20 3530 1137, Email:ammaarah.hafezi@thefitchgroup.com
Additional information is available on
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