(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of National Bank of Ras Al Khaimah (Rakbank) at ‘A-’ and ‘A2’, respectively. At the same time, CI Ratings has affirmed Rakbank’s Bank Standalone Rating (BSR) of ‘bbb’, Core Financial Strength (CFS) rating of ‘bbb’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR remains Stable.
Rakbank’s LT FCR is set two notches above the BSR of ‘bbb’ to reflect the high likelihood of extraordinary support from the UAE government in case of need. The government (sovereign ratings: ‘AA-’/ ‘A1+’/ Stable) has demonstrated such support in the past and, in CI’s view, has the means and willingness to continue to do so in the future.
The Bank’s BSR is derived from a CFS rating of ‘bbb’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The CFS rating is supported by Rakbank’s long track record of generating strong operating profitability ratios, solid capital ratios, and sound asset quality with more than full coverage of NPLs. Its good retail franchise generates substantial income and is a non-financial factor supporting the rating. The GDP contraction last year has raised credit risks across all the major sectors. This, along with exposures to small businesses that tend to be more vulnerable in a downturn and customer concentrations in the deposit base (though much better than the peer group average) are the main credit challenges.
Our OPERA assessment reflects the UAE’s continuing dependence on hydrocarbons, although less so than neighbouring countries, with the economic risk partially mitigated by the support of the wealthy emirate of Abu Dhabi. It also reflects the overall sound financial position of the banking sector. However, any new pandemic led disruptions in the economy would adversely impact local banks.
Rakbank’s business is being increasingly diversified away from the retail/SME banking segment, which nevertheless continues to make significant contributions to income. Wholesale banking, FI and treasury operations are expanding as part of an overall strategy to diversify operations. Recent mergers among larger banks have raised competitive pressures in the country but in CI’s view, Rakbank’s retail banking franchise, underpinned by good product innovation and a strong technology base as well as an established reputation, can withstand this. Growing the wholesale business will be challenging given the weak demand from the private sector at present, but prospects are likely to improve as the economy recovers. The Bank’s good and stable management team has delivered consistently sound results over several years.
Rakbank’s loan impairments increased last year due to the global pandemic. Moreover, given the decline in gross loans (driven by the contraction of risk exposures across all major product categories and customer segments) the NPL ratio worsened but remained below the peer group average. Stage 2 loans continue to be at a moderate level. The Bank has built sizeable provisions and its loan-loss reserve coverage ratio has remained well above 100% over the last few years. Its good capital base and high operating profitability provide additional buffers. While the SME exposure is moderately large, risks are balanced overall by the low customer concentration level, the absence of significant direct exposure to the real estate and construction sectors, and overall solid credit management standards. The Bank has offered payment holidays to some of its customers affected by the Covid-19 crisis which will expire by this year-end. However, this book is very small and Stage 3 migration from this portfolio is likely to be negligible particularly given the economic recovery underway in the country. The loan book is expected to grow this year as GDP growth gains momentum. The investment portfolio, which has risen in recent years, as part of an overall strategy to diversify balance sheet assets, is also of good quality.
Rakbank’s operating profitability, though declining, has been strong for many years and the Bank has delivered consistently good results over several business cycles. High margins (due to the sizeable retail and business banking loan portfolio) and a large non-interest income (non-II) base (reflecting a diversified and wide range of products and services) have underpinned its overall good operating income. Although the Bank’s net interest margin (NIM) has been falling steadily over the last several years, this was mainly because of its focus on wholesale banking and the diversification of the loan book. In 2020, NIM and net interest income declined due to the steep fall in interest rates and the contraction of the loan portfolio. Rakbank’s non-II also declined last year due to the fall in economic activities. While the operating profitability ratio has fallen it remains strong and much higher than the sector median. However, high risk charges led to a low net profit and an ROAA of less than 1%. The provision charge could remain high for some more quarters, but we expect the economic recovery that is currently underway to gain momentum and boost the Bank’s income. In our view, given its wide and innovative product range and the diversified nature of its core businesses, Rakbank’s profitability could improve fairly quickly in the recovery phase of the current cycle.
The Bank has a large, well-diversified and deep deposit base, with lower levels of customer concentrations compared to many peer banks. The customer deposit base is also characterised by a high level of CASA balances. While wholesale funds have grown, these are still at acceptable levels and pose little refinancing risk. CI believes that the funding profile is unlikely to change significantly going forward.
Capital ratios continue to be strong. Key ratios improved in 2020 despite the difficult operating environment and the low net profit – this was partly due to a reduction in risk weighted assets (RWAs). The bulk of the Bank’s regulatory capital consists of common equity and its CET 1 ratio is currently higher than the sector median. Rakbank’s capital is also not at risk from unprovided NPLs. We expect the Bank to grow its RWAs this year, but key ratios are likely to be maintained at solid levels. Shareholders are supportive and are expected to participate in capital raising activities if required. The Bank has the option to raise Tier 1 or Tier 2 capital.
Rating Outlook
The Stable Outlook reflects our expectation that the ratings are unlikely to change over the next 12 months. We expect the economic recovery that is currently underway to gain momentum later during the year and have a favourable impact on the banking sector’s financials in 2022. Rakbank’s sound financial fundamentals place it in a good position to gain in the recovery phase of the business cycle. NPLs could rise due to the lingering effects of the crisis but we expect this to be manageable.
Rating Dynamics: Upside Scenario
An upgrade over the next 12 months appears remote at this stage since this would require an improvement in the Bank’s standalone profile, which could come from a much stronger capital position, better asset quality and a substantially larger balance sheet.
Rating Dynamics: Downside Scenario
The LT FCR could be downgraded by one notch if the Bank’s credit profile deteriorates. This could result from a significant weakening of asset quality or capitalisation that the Bank may not be able to correct in a reasonable period.
Contact
Primary Analyst: Karti Inamdar, Senior Credit Analyst; E-mail: karti.inamdar@ciratings.com
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst
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