S&P: NBAD ratings affirmed At 'AA-/A-1+'; outlook stable

02/07/2015 16:43 AST

Standard & Poor's Ratings Services today affirmed its 'AA-/A-1+' long- and short-term counterparty credit ratings on National Bank of Abu Dhabi (NBAD). The outlook is stable.

“The affirmation incorporates our view that NBAD will continue to operate with strong financial and business metrics over the next 24 months. We think NBAD has a high-quality management team with a strong track record. Given NBAD's well-established franchise in the United Arab Emirates (UAE) and its strong relationship with the Abu Dhabi government, we expect the bank will protect its leading market position. We also think the bank's earnings generation will remain generally robust despite stiffening competition in the UAE banking sector.

“Since the global financial crisis in 2009, NBAD has focused on improving its liquidity and built up a large base of short-term liquid assets. Consequently, the bank's loan leverage as of year-end 2014 was 50 per cent, significantly below the 60 to 65 per cent average we see for its domestic and regional peers. Cash, money market facilities, and a high-quality securities portfolio represent about 45 per cent of the bank's balance sheet. The bank's ratio of broad liquid assets to short-term wholesale funding was above 2.0x at year-end 2014, and we expect it will remain at these levels over the next two years. The bank also continues to have access to a large and stable funding base from the Abu Dhabi government and its related entities, which allowed it to report a loan-to-deposit ratio of about 80 per cent and a stable funding ratio of 123.3 per cent at year end 2014. Because we expect the bank's funding and liquidity will continue to exhibit strong metrics over the next two years, we have revised our assessments of funding to "above average" from "average" and liquidity to "strong" from "adequate."

“We have revised down our assessment of the bank's capital and earnings to "strong" from "very strong" because we think it's unlikely that our risk-adjusted capital (RAC) ratio for the bank, before adjustments, will improve and remain above 15 per cent over the next few years. We expect the bank will continue to expand its overseas activities, including in countries with higher economic risk than in the UAE, while maintaining a dividend payout ratio of 30 to 35 per cent. The bank raised Tier I perpetual capital of $750 million in June 2015.

Under our criteria, this hybrid issue has "intermediate" equity content. Although we think NBAD has the ability to raise some additional capital, it will likely have a hard time sustaining a RAC ratio comfortably above 15 per cent over the longer run.

“Our revised assessments of funding and liquidity, as well as capital and earnings, are neutral for the bank's stand-alone credit profile, which we continue to assess at 'a', and for our ratings on NBAD.

“The stable outlook on NBAD reflects our view that the bank's dominant domestic position in the UAE is well secured, owing to its strong relationship with the Abu Dhabi government. The bank's position should enable it to operate over our 2015-2017 outlook horizon with strong operating profitability, strong capitalisation, and limited credit losses.

“Although not our base-case expectation, a negative rating action on NBAD could result from a stress scenario in which the bank's asset quality deteriorated significantly as a result of higher-than-expected credit losses from the bank's growth overseas.

“An upgrade would follow either an upward revision of NBAD's SACP to 'a+' from 'a', or a two-notch upgrade of the long-term sovereign rating on Abu Dhabi to 'AAA' from 'AA'. We consider both scenarios to be highly unlikely in the next few years.”

CPI Financial