(MENAFNEditorial) 24th August 2016
Rakbank's Ratings Affirmed with a 'Stable' Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed the Financial Strength Rating (FSR) of the UAE's Rakbank at 'A-'. The principal factors supporting the rating are the Bank's consistently strong operating profitability, solid customer franchise, very high capital adequacy ratio, and satisfactory liquidity. Asset quality ratios continue to be sound despite some weakening in recent years. However, restructured performing loans remain high and this along with the Bank's high non-performing loan (NPL) net accretion rate and high ongoing credit risks are constraining factors. The Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at 'A-' and 'A2', respectively, underpinned by the Bank's good financials and management and the strong likelihood of support from the UAE authorities. The Support Rating is maintained at '2'. The Outlook for all ratings is 'Stable'.
Rakbank's asset quality indicators weakened in 2015 and H1 2016, reflecting the elevated credit risks in the SME and small business segments in the country, but its NPL ratio is still low. The Bank's high NPL accretion rate is directly attributed to its sizeable exposure to unsecured retail and small business credit. However, its wide net interest margin can comfortably absorb retail write-offs and is a major mitigating factor. Restructured performing loans are high, but these are doing well with only a very low likelihood of the portfolio affecting the Bank's future asset quality.
The loan-loss reserve (LLR) coverage ratio is high. The Bank maintains general provisions in its capital (as a special non-distributable reserve); the aggregate of LLRs and general provisions in capital have exceeded NPLs for many years. The coverage ratio improved in H1 2016 following a large risk charge incurred by the Bank. Rakbank's large capital base provides an additional cushion – its LLRs and free capital covered NPLs nearly seven times in H1 2016. The Bank is also profitable enough to absorb even higher risk charges.
Rakbank remains solidly capitalised despite a decline in the capital adequacy ratio in recent periods. Higher earnings and good profit retention have helped to expand the capital base over the years. Capital formed nearly a fifth of the balance sheet at end 2015.
Rakbank's liquidity ratios continue to be satisfactory. Despite the tighter liquidity in the banking system last year, the Bank's key liquidity ratios improved slightly on the back of strong growth in customer deposits and higher medium-term funding. Short-term interbank liabilities continue to be low. The deposit base is characterised by substantial current and savings account balances – a large percentage of which has historically proven to be stable – a fact that contributes to the Bank's low funding cost. Customer concentration in the deposit base is low compared with other banks of similar size.
Rakbank is one of the most profitable among local banks with a very high and better than peer group average operating profitability ratio and return on average assets (ROAA). Strong growth in lending, high (though narrowing) margins, and a sizeable non-interest income (NII) base have underpinned its operating profitability for many years. However, higher risk charges led to a fall in net profit and ROAA last year. In H1 2016, the Bank recorded a good increase in operating profit on the back of higher NII and reduced operating costs, but net profit and ROAA fell sharply due to a significant increase in the net risk charge. Narrowing margins (partly due to a higher funding cost) and higher risk charges could continue to impact income in the coming quarters but Rakbank's overall profitability ratios are expected to remain good.
Rakbank is a small to medium-sized bank in the UAE with a strong focus on consumer and commercial banking. The Bank has built a good reputation for quality customer services. It was incorporated in 1976 and is 52.8% owned by the government of Ras Al Khaimah (both directly and indirectly), one of the smaller emirates located in the northern part of the UAE. Rakbank currently operates 35 branches across the country and is primarily a retail banking institution. It had total assets of almost AED41 billion (USD11.1 billion) at end June 2016.
CONTACT
Primary Analyst
Karti Inamdar
Senior Credit Analyst
Tel: +91 124 401 2142
E-mail: karti.inamdar@ciratings.com
Secondary Analyst
Tom Kenzik
Senior Credit Analyst
E-mail: tom.kenzik@ciratings.com
Rating Committee Chairman
Rory Keelan
Senior Credit Analyst
The information sources used to prepare the credit ratings are the rated entity and public information. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in July 1994. The ratings were last updated in August 2015.
The principal methodology used in determining the ratings is the Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.
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