Commercial Bank of Dubai’s ratings affirmed with a ‘Stable’ Outlook

11/07/2017 13:45 AST

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed the Financial Strength Rating (FSR) of UAE’s Commercial Bank of Dubai (CBD) at ‘BBB+’.

The Bank’s good capital adequacy, liquidity and profitability parameters, as well as improving loan-loss reserve (LLR) coverage are major factors supporting the rating. However, CI notes that nearly all of the Bank’s profitability metrics have weakened over the last few years due to the challenging operating environment. This is also true of the peer group.

Tighter sector liquidity in 2015 and in the first few months of 2016 led to a steady increase in funding costs across the sector, and although the banking sector’s liquidity levels are presently comfortable (partly because credit demand remains low) funding costs continue to rise due to higher interest rates (reflecting rising USD interest rates). However, CBD has a competitive advantage in that its large current and savings account (CASA) balances have helped to keep its funding cost lower than the peer group average. The Bank’s rising CASA in Q1 2017 portends well for its funding cost this year. CBD has built multiple revenue streams, which generate a high level of gross income. While income growth was subdued last year and the operating profitability ratio continued to fall, it remained higher than the peer group average. Throughout the recent slowdown, the Bank’s loan book grew at a faster pace than the sector average as it continued to support its traditional customer base of established Dubai-based business conglomerates. CBD’s Q1 2017 performance suggests that the Bank would do well at the operating profit level this year.

Higher provisioning expenses in 2016 and Q1 2017 have impacted CBD’s net profit and ROAA and CI Ratings believes that these key parameters could remain under pressure in the remaining quarters of this year. In common with many banks in the UAE, CBD experienced some increase in impairments in its SME and retail portfolios in 2016. The rise in non-performing loans (NPLs) in the first quarter of this year was largely due to the tightening of internal asset classification norms ahead of the adoption of the IFRS 9 standard next year. This was also the reason why the risk charge rose in Q1 2017. The Bank maintained a 100 per cent LLR coverage ratio (excluding past due not impaired loans over 90 days) at end 2016 and end Q1 2017. However, the ratio remains below the sector average. The Bank holds substantial collateral against its impaired loans and given its good track record of recoveries so far, CBD expects to be able to recover a major portion of its impaired loans.

There continue to be lingering asset quality concerns in the SME and retail portfolios of all the UAE banks. However, CI believes that CBD’s good income generation would be sufficient to absorb any major increase in risk charges. This is one of the factors supporting the decision to maintain the FSR. Moreover, CBD’s watch-listed and past due loans less than 90 days old have declined as a percentage of gross loans, predicting a better NPL ratio going forward. On the negative side, CBD’s NPL ratio continues to be higher than the peer group average and is also higher than those of similarly rated banks. This is partly explained by the fact that the Bank continues to carry fully provided impaired loans on its balance sheet.
CBD’s capital adequacy ratio (CAR) has fallen steadily over the last few years with risk-weighted assets growing faster than regulatory capital. However, both CAR and the Tier 1 ratio are presently at good levels, though below the high peer group average. The Bank’s capital to risk asset ratio is strong and is close to its Tier 1 ratio; the ratio is also better than the sector average, partly reflecting the Bank’s low claims on sovereigns. Both CAR and the Tier 1 ratio are important supporting factors for the FSR.

CPI Financial