DIB's IDRs, SR and SRF reflect an 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 revenue mostly from hydrocarbon production, despite lower oil prices. 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 by the authorities' close ties with and part-government ownership links to a number of banks.
DIB's SRF is at the UAE domestic systemically important banks' (D-SIB) SRF of 'A', reflecting its D-SIB status in the UAE and in particular Dubai. DIB's market share of total system assets has been regularly rising and reached 9% at end-1H18.
SPV AND SENIOR DEBT
The rating of the senior unsecured debt (Sukuk) issued by DIB Sukuk Limited (100% owned subsidiary) under DIB's trust certificate issuance programme is in line with the bank's Long-Term IDR 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.
DIB's VR reflects only acceptable asset-quality metrics, sizable financing book concentration and still high exposure to the real estate sector. It also considers the bank's strong domestic franchise, healthy profitability and adequate capital ratios, as well as sound liquidity and funding backed by a large and stable customer deposit base.
DIB is the fourth-largest bank and the largest Islamic bank in the UAE, where it has very strong brand recognition.
Asset quality metrics have been improving. The impaired financing ratio was lower than the peer average at 3.3% end-3Q18 and reserve coverage was adequate at 122%. However, DIB's stage 2 financing represented 10% of the total book at end-3Q18, leading to a total stage 2+3 financing of 13.3% of gross financing, which is relatively high.
DIB has healthy profitability that is consistent through economic cycles. The net financing margin (NFM) was 2.8% in 9M18, comparing well with peers'. It has remained stable as DIB has successfully repriced its financing book to offset the increase in funding costs. Competition for deposits remains fierce, but we believe DIB is well placed to protect its NFM due to its strong franchise. The bank's cost to income ratio reduced to 29.5% in 9M18 and sits well below peers. Operating returns were above peers' in 9M18, as they benefited slightly from lower financing impairment charges as a proportion of pre-impairment operating profit (13.2%), with an operating return on risk weighted assets of 2.8%.
DIB completed an AED5.1 billion rights issue in June 2018 as its capital ratios have been pressured by high financing growth and increased regulatory capital requirements since DIB was designated a D-SIB by the authorities in 2017. Accordingly, DIB's Fitch Core Capital (FCC) ratio increased to 14.8% at end-3Q18 and the Tier 1 ratio to 17.2%, due to AED7.3 billion Additional Tier 1 sukuk, now comparing well with UAE peers. Needs for further capital issuance will depend on financing growth levels. These have been high in recent years (2017: 15%; 2016: 18%; 2015: 29%; 2014: 30%), and consistently above the market average. While we expect DIB to pursue its growth strategy, it slowed down in 9M18 (7%), which should alleviate pressure on capital ratios.
DIB's deposit base is less concentrated than peers', benefiting from its strong retail franchise. The bank holds an adequate stock of liquid assets (cash balances less mandatory reserves + net interbank placements + investment grade securities maturing within one year) covering 16% of deposits at end-3Q18. The financing to deposits ratio had reduced to 92.5% at end-3Q18.
In assessing DIB'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.
IDRS, SR AND SRF
DIB's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE authorities or on their propensity to support the banking system or the bank.
SPV AND SENIOR DEBT
The rating of the sukuk issued under DIB Sukuk Limited is subject to the same sensitivities as the bank's IDR.
DIB's VR remains sensitive to deterioration in asset quality affecting the bank's capital or profitability, or to high financing growth pressuring the bank's capital ratios. A track record of asset quality performance and a further reduction in single-name and sector concentration could lead to an upgrade.
The rating actions are as follows:
Dubai Islamic Bank
Long-Term IDR affirmed at 'A'; Outlook Stable
Short-Term IDR affirmed at 'F1'
VR affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
DIB Sukuk Limited:
Senior unsecured trust certificates affirmed at 'A'
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Additional information is available on
Bank Rating Criteria (pub. 12 Oct 2018)
Sukuk Rating Criteria (pub. 25 Jul 2018)
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