(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 Emirates NBD PJSC (ENBD) at ‘A+’ and ‘A1’, respectively. CI Ratings has also affirmed ENBD’s Bank Standalone Rating (BSR) of ‘bbb’, Core Financial Strength (CFS) rating of ‘a-’ and Extraordinary Support Level (ESL) of Very High. The Outlook for the LT FCR and BSR is Stable.
The Bank’s LT FCR is set four notches above the BSR to reflect the very high extraordinary support level (ESL). Our ESL assessment takes into account the Bank’s large size and major domestic presence, its majority ownership by the government of Dubai, as well as its status as a domestic systemically important bank. The UAE government (sovereign ratings: ‘AA’/ ‘A1+’/ Stable) has a good track record of supporting the banking system, and it is our current expectation that it would be willing and financially capable of assisting ENDB if required.
The BSR is derived from a CFS rating of ‘a-’ and an adjusted Operating Environment Risk Anchor (OPERA) of ‘bbb-’, which is lower than the OPERA of UAE (‘bbb’) due to the Bank’s significant exposure to assets in higher risk Turkey. ENBD’s principal credit strengths are its strong capital ratios, full coverage of impaired loans (with high provisioning for Stage 3 exposures), its low Stage 2 loans, and good liquidity and operating profitability. In addition, the Bank’s large size, strong market position, good customer franchises and diversified business base are non-financial factors supporting the ratings. The principal challenges for the Bank are the heightened credit risk in the UAE economy following the pandemic-led GDP contraction last year and elevated risks in the Bank’s Turkish subsidiary due to the weak local economy, which has worsened on account of the Covid-19 crisis. Other challenges include customer concentrations in loans and large related party exposures (reflecting sizeable dealings with the government of Dubai).
The Bank has a dominant market position and a strong customer franchise in the country, with a well-diversified business base providing multiple and steady revenue streams. Its digital focus is a competitive strength, placing it in the forefront of banking innovation. The Bank has diversified away from the UAE economy following its 2019 acquisition of DenizBank (DZB), Turkey, although this has exposed it to a weaker operating environment. The expansion into Turkey, Saudi Arabia, Egypt and India, all large economies with sizeable populations, would go a long way in diversifying ENBD’s balance sheet and widening income streams, although there will be attendant risks in each of these countries. In CI’s view the Bank’s capable management and good risk culture places it in a strong position to successfully manage its overseas assets.
Despite the GDP contraction last year, ENBD’s asset quality ratios have been resilient and the Bank has been less impacted by the global pandemic than many peers. There was only a marginal increase in NPLs in H1 21 and the NPL ratio was still below the sector median. Furthermore, the Bank has not only maintained its strong provisioning cover but also increased it in H1 21. The takeover of DZB in 2019 did not alter the balance sheet structure or asset quality metrics in a major way. ENBD also has a low level of Stage 2 loans and its deferred loan portfolio is not expected to significantly impact its asset quality. While we expect NPLs to rise over the coming quarters this is likely to be manageable. The Bank’s good underwriting standards, strong capital base and high operating profitability are expected to cushion future asset quality shocks.
Concentration risks to the sovereign, partly reflecting the Bank’s flagship status in Dubai, continue to be high and are unlikely to improve significantly in the short term. In our view, credit risks from the exposure are likely to be very low given that the ruler of the emirate has the backing of the UAE government.
Profitability ratios fell in 2020 due to the global pandemic, the significant decline in interest rates and reduced business volumes, reflecting the contraction in the local economy last year. The Bank’s operating profitability ratio continued to be sound, despite falling, on the back of a still wide net interest margin, moderately good non-interest income and sound cost efficiencies. The Bank also benefited from DZB’s higher margins and good operating income. A substantial rise in provisioning expenses last year due to the Covid-19 crisis and additional provisioning undertaken by DZB contributed to the steep decline in net profit and ROAA (however, the previous year’s figure had also been boosted by extraordinary income). In H1 21, the Bank’s pre-impairment operating profit continued to decline y-o-y, reflecting the lower interest rate environment, however this was better than its performance in the preceding half-year signalling an improving local economy. Net profit and ROAA rebounded in H1 21 due to reduced provisioning expenses. Although operating income is expected to rise in the following year, high credit costs could keep ROAA lower than pre-Covid-19 levels. However, key ratios are likely to remain robust. The Bank has a well-diversified business base and a wide range of products and services that can produce reasonably stable earnings through a business cycle.
ENDB’s liquidity is good overall with adequate buffers of highly liquid assets, reliable and diversified sources of customer deposits, and good access to wholesale funding. The Bank has a high level of retail deposits in its customer deposit base (more so than many peer banks) and its CASA balances are sizeable. Therefore, its customer concentration levels are lower than those of many peer banks, although they remain high by global standards. It is also, to some extent, less vulnerable to stressed liquidity conditions than other banks in the country. CASA has risen substantially in recent periods even as customer deposits have declined with the exit of high-cost time deposits. However, loan-based liquidity ratios continue to be good. Wholesale borrowings are at a moderate level and refinancing risks are low. There were no major changes to the liabilities structure following the takeover of DZB, which also has a good retail customer deposit base.
The Bank’s capital ratios continue to be strong despite the difficult conditions in the market and a marked decline in net profit last year. Key ratios improved marginally in H1 21. Capital ratios are well above the regulatory minimum and better than those of other large banks in the country. We expect these ratios to remain strong over the next year given that the growth in risk-weighted assets is likely to be modest, and that operating profits are expected to strengthen and be sufficient to absorb risk charges. Capital is also likely to cushion further foreign exchange translation losses from Turkish lira devaluation.
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. Given the Bank’s good franchise strength its earnings are likely to improve, although it could take several quarters for key profitability ratios to recover to pre-Covid-19 levels. NPLs could rise due to lingering adverse 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 a sustained improvement in the Bank’s standalone profile over a number of years. This could come from a significant decline in the NPL ratio, better profitability, and a much stronger capital position.
Rating Dynamics: Downside Scenario
A one-notch downgrade of the Bank’s LT FCR would require a deterioration of the Bank’s standalone strength or a downgrade of the sovereign. The former could be caused by a significant weakening of financial fundamentals that the Bank may not be able to correct in a reasonable period. A downgrade of the sovereign would probably be linked to a prolonged period of very low oil prices and a substantial fall in external assets.
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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