Fitch affirms United Arab Bank's IDR at 'BBB+'; downgrades VR to 'B'; Outlook Stable

Fitch's view of support factors in the sovereign's strong ability to support the banking system

  
(The following statement was released by the rating agency) Fitch Ratings-London-03 June 2020: Fitch Ratings has affirmed United Arab Bank P.J.S.C.'s (UAB) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook and downgraded the Viability Rating (VR) to 'b' from 'b+'. Key Rating Drivers IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT

UAB's Long- and Short-Term IDRs, Support Rating (SR) and Support Rating Floor (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 sovereign's strong ability to support the banking system, sustained by its sovereign wealth funds and ongoing revenue mostly from hydrocarbon production, despite lower oil prices. Fitch also expects a high willingness of the UAE authorities to support the banking sector, which has been demonstrated by its long record of supporting domestic banks, and is also suggested by close ties with and partial government ownership of some banks.

UAB's SRF is two notches below the UAE domestic systemically important banks' SRF of 'A' due to Fitch's view that UAB is of moderate systemic importance based on its market share of below 1% of total UAE banking system assets at end-2019.

We assign Short-Term IDRs according to the mapping correspondence described in our rating criteria. A 'BBB+' Long-Term IDR can correspond to a Short-Term IDR of either 'F2' or 'F1'. In the case of UAB, we opted for 'F2', the lower of the two Short-Term IDR options. This is because a significant proportion of the UAE banking sector funding is related to the government and a stress scenario for banks is likely to come at a time when the sovereign itself is experiencing some form of stress. Fitch judges this "wrong-way" risk to be high in the UAE, and this is reflected in the Short-Term IDR, which primarily reflects issuers' liquidity and funding profiles.

VR

The downgrade of the VR reflects the deterioration in the bank's asset quality and weaker performance. The VR also considers UAB's small franchise, undiversified business model, high problem loans in light of which capitalisation is only adequate. The rating also factors in the bank's acceptable funding structure and sufficient liquidity.

The bank's franchise is small, with a market share of less than 1% of banking sector assets and loans at end-2019. UAB is therefore a price taker in the UAE and has no discernible competitive advantages. The bank offers wholesale and retail banking services, although the bank is more focused on corporate banking, which accounted for 66% of operating income in 2019. Corporate banking is primarily with local medium-sized corporates and UAB has only negligible exposure to SMEs.

UAB's asset quality is among the weakest in the UAE and is vulnerable to the weaker operating environment. Stage 3 loans were high at 11.4% of gross loans at end-2019, even after a large portion of the SME book was written off in the last four years. Stage 2 loans were also a high 15.6% (16.6% of gross loans at end-2018), and combined with stage 3 exposures represented a high 27% of gross loans. This reflects the bank's large exposure to medium size corporates, which will suffer further in 2020 in the economic downturn. Reserve coverage of impaired loans improved and was nearing 100% at end-2019 but provisioning remained weak relative to total (stage 3 + stage 2) problem loans. Loan concentrations are also high, albeit in line with the average for small UAE banks.

The bank was loss making in 2019 due to high provisions charges driven by more conservative credit risk measures adopted by management rather than asset quality deterioration. The bank's small franchise and undiversified business model constrain fee income generation, and efficiency is weak, with the 2019 the cost/Income ratio at 58% compared with a banking sector average of around 35%.

UAB's capital position improved in 2018 thanks to a rights issue, and the CET1 ratio was 13.6% at end-2019. However, capital buffers are only adequate considering unreserved problem loans, high single-name concentrations and weak profitability. The bank has not paid dividends since 2014.

UAB is primarily funded by customer deposits, which were a high 79% of non-equity funding at end-2019. Current accounts and savings accounts comprised only 24% of total deposits, driving the bank's high cost of funding. High reliance on corporate deposits results in significant concentrations, with the largest 20 depositors representing 49% of customer funding at end-2019, higher than at most other small UAE banks.

The bank's liquidity is sufficient, and the loans/customer deposits ratio (103% at end-2019) is in line with peers. Liquid assets (comprising cash balances and a liquid bonds portfolio) comprised 20% of total assets and covered 30% of customer deposits at end-2019. RATING SENSITIVITIES IDRS, SR, SRF AND SENIOR DEBT

UAB's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE authorities or of their propensity to support the banking system or the bank.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Given our already existing view of the high creditworthiness of the UAE and existing high propensity to support the banking system and the bank, positive rating action is unlikely.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in our view of the creditworthiness of the UAE authorities or their propensity to support the banking system or the bank could lead to a downgrade of the bank's IDRs.

VR

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Downside could arise from further deterioration in asset quality that significantly erodes capital.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A fall in UAB's problem loan exposures would reduce downward pressure on the VR. Best/Worst Case Rating Scenario International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. Public Ratings with Credit Linkage to other ratings UAB's IDRs, SR and SRF reflect a high probability of support available to the bank from the UAE authorities if needed. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit

United Arab Bank P.J.S.C.; Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F2 ; Viability Rating; Downgrade; b ; Support Rating; Affirmed; 2 ; Support Rating Floor; Affirmed; BBB+

Contacts: Primary Rating Analyst Redmond Ramsdale, Senior Director +44 20 3530 1836 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN

Secondary Rating Analyst Nicolas Charreyron, Senior Analyst +44 20 3530 2715

Committee Chairperson James Watson, Managing Director +7 495 956 6657

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com

Additional information is available on

Applicable Criteria Bank Rating Criteria (pub. 28 Feb 2020) (including rating assumption sensitivity) ()

Additional Disclosures Dodd-Frank Rating Information Disclosure Form () Solicitation Status () Endorsement Status () Endorsement Policy ()

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