Fitch affirms National Bank of Ras Al-Khaimah at 'BBB+'; Outlook Stable

Rakbank's IDRs, Support Rating (SR) and Support Rating Floor (SRF) reflect a high probability of support available to the bank

  
(The following statement was released by the rating agency) Fitch Ratings-London-28 May 2020: Fitch Ratings has affirmed National Bank of Ras Al-Khaimah P.J.S.C. (Rakbank) Long-Term Issuer Default Rating (IDR) at 'BBB+' with Stable Outlook. A full list of rating actions below. Key Rating Drivers IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT

Rakbank's 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 sovereign wealth funds and recurring 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 their long track record of supporting domestic banks, and is also suggested by their close ties with and partial ownership of some banks.

Rakbank's SRF is two notches below the UAE Domestic Systemically Important Banks' (D-SIB) SRF of 'A', reflecting Fitch's view that Rakbank is of moderate systemic important based on its approximate 2% market share of total assets in the UAE banking sector at end-2019 and the bank's niche retail and SME focus.

Rakbank's Short-Term 'F2' IDR is the lower of two options mapping to a 'BBB+' Long-Term IDR as described in our rating criteria. This is because a significant proportion of the UAE banking sector funding is related to the government and a stress on Rakbank is likely to come at a time when the sovereign itself is experiencing some form of stress. Fitch judges this "wrong-way" risk as high in the UAE, and this is reflected in the choice of Short-Term IDR, which primarily reflects Rakbank's liquidity and funding profiles.

SPV AND SENIOR DEBT

The ratings of the senior unsecured notes issued under the bank's medium-term note (MTN) programme through SPV Rakfunding Cayman Ltd (a fully-owned subsidiary) are in line with the bank's IDRs because Fitch views the likelihood of default on senior unsecured obligations issued by the SPV as being the same as that of the bank.

Viability Rating

The Viability Rating (VR) of Rakbank reflects its high risk appetite relative to peers', weak asset quality, modest franchise, only satisfactory profitability on a risk-adjusted basis and only adequate capital ratios, given the bank's higher risk appetite and vulnerable asset quality. It also factors in the bank's business- model diversification strategy, adequate funding and liquidity, and good management.

Rakbank has an above-average risk appetite given its higher-risk business model focused on retail and SME lending. These two segments comprised 51% and 22% of total loans, respectively, at end-1Q20. These segments are core to the bank's strategy and have proven to be more vulnerable in economic downturns. At the same time, the bank has been expanding its wholesale business, which represented 27% of total loans at end-1Q20. We view this business diversification as positive for the bank's risk profile, but the development of a more balanced business model will take time, in our view.

Our assessment of Rakbank's asset quality incorporates expected deterioration in the bank's core lending segments (personal loans and SMEs) as these are sensitive to a prolonged economic slowdown in the UAE. The bank's impaired loans ratio fell to 3.8% at end-2019 from 4.4% at end-2018 due to a lower stock of stage 3 exposures and a growing loan book; however, the level of write-offs remains higher than at UAE peers and increased in 2019, without which the ratio would have been higher.

Restructured but performing loans accounted for 4.7% of loans at end-2019, and Stage 2 and Stage 3 loans were a combined 10.1% of total loans, higher than the UAE peer average but an improvement from 14.6% at end-2018.

Impaired loans generation was high in 2019 at 4.2% of gross loans. Loan impairment charges are declining but remained high at 3.7% of average gross loans in 2019, significantly above the sector average; these increased to 5.3% in 1Q20, due to higher provisioning in anticipation of increased pressures from COVID-19 disruptions, although this trend was observed with varying degrees across the industry.

Total coverage of impaired loans was healthy at 123% at end-2019. Reserves for impaired loans increased significantly in 2018 owing to the adoption of IFRS 9. Fitch views the new reserve levels as more adequate for the bank's risk profile. Coverage of Stage 2 and Stage 3 loans combined was 48% at end-2019, but is still deemed adequate.

Rakbank's share of around 2% of UAE banking system assets and deposits at end-2019 limits the bank's pricing power. Albeit fairly small, Rakbank's retail banking and SME finance franchise benefits from strong recognition. Rakbank's management has in-depth knowledge of the regional market and is highly experienced in local and international banking.

Rakbank is largely funded by stable customer deposits, which accounted for about 77% of total non-equity funding at end-1Q20. The deposit base is more granular than peers' due to the bank's retail focus, providing a stable and fairly low-cost funding base. Rakbank diversifies its funding through senior unsecured debt issuance, and has demonstrated good access to capital markets when required. The bank's liquidity profile is acceptable, with net liquid assets equivalent to 20% of customer deposits at end-2019. In response to the pandemic the Central Bank of the UAE relaxed liquidity requirements and reduced the eligible liquid assets ratio as well as cash reserve requirements against current and savings accounts (CASA) deposits, providing an immediate boost to Rakbank's liquidity, as well as for the sector as a whole.

Rakbank's capital ratios have sharply declined in recent years, albeit from high levels. These are now only adequate for the bank's risk profile and vulnerable asset quality. Lower capital ratios have resulted from strong growth, lower retained earnings and regulatory changes, in particular the implementation of IFRS 9. Nevertheless, capital ratios remain above peers'. In our base case we expect these to remain fairly stable in 2020 due to likely muted growth, but we see a significant risk of higher provisioning requirements and loan impairment eroding capital buffers in 2H20.

Earnings and profitability metrics are declining from historical levels due to the bank's diversification strategy towards lower-risk assets. Fitch now views these metrics as only satisfactory given the bank's still higher-risk business model and high loan impairment charges compared with most peers'. The Fitch-calculated operating profit/ risk weighted assets (RWAs) ratio sharply declined in 2018 (in line with the sector average) from over 5% prior to 2016, and was 2.4% in 2019.

The bank's net interest margin (NIM; 5.6% in 1Q20) remains well above the peer average, but has come down significantly from the 2015 level of 9.3%, also due to the bank's diversification strategy. Fitch expects a further reduction in margins as Rakbank continues to expand its wholesale lending. RATING SENSITIVITIES IDRS, SR, SRF

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

SPV AND SENIOR DEBT

The ratings of the senior unsecured notes issued under the bank's MTN programme through SPV Rakfunding Cayman Ltd are subject to the same sensitivities as the bank's IDRs.

VR

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

-An upgrade of the VR is unlikely given the vulnerability of the bank's asset quality and earnings in the weaker operating environment, particularly the SME financing segment.

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

-Further deterioration in the bank's asset-quality metrics or capital ratios could result in a downgrade of Rakbank's 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 Rakbank'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

The National Bank of Ras Al-Khaimah (P.S.C.); Long Term Issuer Default Rating; Affirmed; BBB+; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F2 ; Viability Rating; Affirmed; bb ; Support Rating; Affirmed; 2 ; Support Rating Floor; Affirmed; BBB+ RAKFUNDING CAYMAN LTD ----senior unsecured; Long Term Rating; Affirmed; BBB+ ----senior unsecured; Short Term Rating; Affirmed; F2

Contacts: Primary Rating Analyst Mahin Dissanayake, Senior Director +44 20 3530 1618 Fitch Ratings Ltd 30 North Colonnade, Canary Wharf London E14 5GN

Secondary Rating Analyst Jamal El Mellali, Associate Director +44 20 3530 1969

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 Ammaarah Hafezi, London, Tel: +44 20 3530 1137, Email: ammaarah.hafezi@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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