Fitch affirms Emirates NBD at 'A+'; Outlook stable

Dubai : Fitch Ratings has affirmed UAE-based Emirates NBD Bank PJSC's (ENBD) 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 below.

KEY RATING DRIVERS

IDRS, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)

ENBD's IDRs, SR and SRF reflect an extremely high probability of support from the UAE authorities (AA-/Stable).

Fitch's view of support factors in the sovereign's strong ability to support the banking system, underpinned by UAE's solid net external asset position, still strong fiscal metrics and recurring hydrocarbon revenues. It also reflects the authorities' very strong, timely and predictable record of supporting its domestic banks and the sovereign's close ties with, and part government ownership of, a number of banks, including ENBD (55.8% owned by Investment Corporation of Dubai (ICD), the investment arm of the government of Dubai).

ENBD's SRF of 'A+' is one notch above the UAE domestic systemically important bank (D-SIB) SRF of 'A', reflecting its flagship status in Dubai.

ENBD's Short-Term IDR of 'F1' is the lower of the two options corresponding to a 'A+' Long-Term IDR as described in our rating criteria. This is because a significant proportion of UAE banking sector funding is related to the government and stress on banks would likely come at a time when the sovereign itself is experiencing some form of stress.

SENIOR DEBT RATINGS

ENBD's senior unsecured programmes and notes issued under these programmes are rated in line with the bank's Long- and Short-Term IDRs, reflecting Fitch's view that the likelihood of default of these obligations is the same as that of the bank.

VR

ENBD's VR reflects its significant concentration to the heavily indebted Dubai government (34% of gross loans and 2.2x common equity Tier 1 (CET1) at end-3Q21) and its government-related entities (GREs) and as such, only adequate capital ratios. The VR also factors in the bank's leading franchise, healthy profitability and strong funding profile.

We believe that the challenges to the UAE economy from the coronavirus pandemic have subsided sufficiently to remove the negative outlook on the operating environment score. Government support measures, higher oil prices and eased restrictions have resulted in increasing economic activity and improved economic growth prospects (Fitch UAE GDP growth forecast: 1.8% for 2021 (non-oil: 3.5%); 5.8% (3.7%) for 2022), which should be supportive of UAE banks' operations in the short to medium term.

ENBD's exposure to the volatile Turkish operating environment through its subsidiary Denizbank (18% of ENBD's consolidated assets), adds downside risks to its operating environment. ENBD's operating environment is scored 'bbb-', one notch below the UAE operating environment.

Fitch considers capitalisation as only adequate in light of ENBD's significant concentration to the Dubai government and the low risk weighting on its related-party exposures (2.2x its CET1 capital). The tangible leverage ratio was 10% at end-3Q21, noticeably below the CET1 ratio of 16.1%. The Tier 1 ratio was 18.1% at end-3Q21 supported by USD750 million additional Tier 1 (AT1) capital notes offsetting the call-back of a former USD500 million AT1 issue. ENBD has healthy internal capital generation and strong ability to raise capital if needed through its shareholders or the capital markets.

ENBD's asset quality metrics have improved in the last five years, with the Stage 3 (S3) loans ratio dropping to 6% at end-3Q21 (14% at end-2013), closer to peers' average. Denizbank accounts for about 15% of total S3 loans. Total reserve coverage strengthened to 127% at end-3Q21 (112% at end-2019) as ENBD booked an additional AED3.8 billion of loan impairment charges (LICs) in 9M21 (2020: AED7.7 billion). However, underlying asset quality remains weak, given the significant exposure to the Dubai government and GREs.

Stage 2 (S2) loans were 7% of total loans at end-3Q21 (6% at end-2020), of which 26% were deferred under the UAE Central Bank credit deferral programme. S2 loans were 21% covered by specific provisions at end-3Q21 (15% at end-2019), comparing well against peers. We expect some migration from S1 to S2 loans after the expiry of the forbearance measures. Deferred instalments were 2.2% of total loans at end-3Q21.

ENBD's profitability metrics compare well with peers. Income diversification is strong, with non-interest income representing 27% of operating revenues in 9M21. ENBD's net interest margin (NIM) declined to 2.7% in 9M21 (3.2% in 2019) due to lower interest rates and but still compares well with peers, supported by its higher low-cost retail funding. The operating return on risk-weighted assets improved to 2.3% in 9M21 (1.7% in 2020) owing to lower LICs (32% of pre-impairment operating profit in 9M21, down from 52% in 2020). Absent significant asset quality deterioration, we do not expect an increase in LICs given the frontloading of provisions.

ENBD's strong funding and liquidity profile is a rating strength. This reflects its strong retail deposit franchise and diversified deposit base (the 20 largest deposits were a low 12% of total deposits at end-3Q21). ENBD has a sound stock of liquid assets (cash and equivalents, investment-grade securities, interbank placements and cash balances less mandatory reserves) covering 32% of its deposits at end-3Q21. The liquidity coverage ratio was 159% at end-3Q21 and net stable funding ratio was comfortably above the regulatory requirements.

-Ends-

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

Additional information is available on www.fitchratings.com 

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