PHOTO
Fitch Ratings-London-July 03: Fitch Ratings has affirmed UAE-based Commercial Bank International's (CBI) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook, and Short-Term IDR at 'F2', Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB+'. The Viability Rating (VR) has also been affirmed at 'b+'. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRs, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
CBI's IDRs, Support Rating and Support Rating Floor reflect the 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, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, and close ties with and part government ownership links to a number of banks.
CBI's Support Rating Floor is two notches below the UAE Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A', due to Fitch's view that CBI is less systematically important based on its less than 1% market share of total assets in the UAE banking system at end-2017, and its niche corporate focus.
VR
CBI's VR reflects the bank's limited franchise, a less diversified business model than peers', weak but improving asset quality metrics and weak capital ratios in light of the bank's concentrated balance sheet and below-average profitability. The VR also takes into account the clean-up of CBI's balance sheet through the write-off of legacy impaired loans, acceptable management and strategy, tightened underwriting standards, albeit with a still limited track record, adequate liquidity, and the ordinary support, including liquidity support, the bank enjoys from its largest shareholder Qatar National Bank (QNB; A+/Stable/F1).
CBI's VR primarily reflects the bank's limited franchise (market share below 1%) and less diversified business model than peers'. It also considers ordinary support from the partnership with QNB, notably on liquidity as the ability to participate with QNB in syndications and large transactions has diminished, given the regional tensions.
CBI's asset quality is weak. The impaired loans ratio is above the UAE average of 5.1%, at 7.8% at end-2017, despite sizeable write-offs in addition to the bank's balance sheet clean-up in 2015. Reserves for impaired loans have remained well below UAE peers' with impaired loan coverage of 46.6% at end-2017. The implementation of IFRS 9 had a negligible impact on reserve coverage at end-1Q18. CBI's loan book remains concentrated, although this is a common characteristic for UAE, particularly with respect to legacy real estate assets.
CBI has weaker capital ratios (the Fitch Core Capital ratio was about 11% at end-2017) than Fitch-rated UAE banks. CBI's capital ratios have been under pressure as revenue generation has not kept up with high loan growth. CBI management intends to keep the total regulatory capital ratio above 14%. At end-2017, the Tier 1 regulatory ratio was 13.7%. The total regulatory capital ratio was 14.8%.
Earnings and profitability metrics have been variable and are well below peers'. Fitch's key earnings and profitability metric - operating profit/risk-weighted assets (RWAs) - demonstrates the variability of the bank's operating profitability, ranging from -2.9% to 1% over the last four years. Over the same period, UAE peers have demonstrated on average a stable 2.2% operating profit/RWAs. A combination of high loan impairment charges relative to operating profit, and an above-average cost-to-income ratio explains why CBI's overall profitability has remained, and is likely to remain, much below the industry average although this is dependent on management's ongoing actions to reduce the bank's cost base.
Fitch views CBI's funding profile as generally stable. Customer deposits are concentrated, although more than 60% are corporate-related, and have historically been stable. The 20 largest deposits accounted for 46.9% of the total at end-2017. CBI complements its deposit funding through a mix of short-term repurchase agreements and perpetual additional Tier 1 securities, demonstrating reasonable access to the capital markets as well as ordinary parental support from QNB respectively.
CBI has a sufficient stock of liquid assets (cash and cash equivalents, short-term interbank placement and liquid securities) equivalent to 15% of deposits, providing an adequate liquidity cushion. CBI's loans-to-deposits ratio is in line with peers'.
RATING SENSITIVITIES
IDRs AND SUPPORT RATING
CBI's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE authorities and on their propensity to support the banking system or the bank. A higher market share and increased government ownership would also be positive.
VR
Further evidence of CBI implementing its strategy, building its franchise, and growing its balance sheet with no material deterioration in the bank's risk indicators could contribute to an upgrade. Upside for the VR could also arise from improvements in the underlying asset quality and capital ratios.
The rating actions are as follows:
Commercial Bank International:
Long-Term IDR affirmed at 'BBB+'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '2'
Support Rating Floor affirmed at 'BBB+'
Contact:
Primary Analyst
Redmond Ramsdale
Senior Director
+44 203 530 1836
30 North Colonnade
London E14 5GN
Secondary Analyst
Mark Cordwell, CFA
Associate Director
+44 20 3530 1644
Committee Chairperson
Artur Szeski
Senior Director
+48 22 338 6292
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.
Additional information is available on
Applicable Criteria
Bank Rating Criteria (pub. 22 Jun 2018)
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Endorsement Policy
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
Copyright 2018 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see
