Tuesday, 02 January 2024 12:17 GMT

United Arab Bank – LT FCR and BSR Raised; Outlook is Revised to Stable


(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has raised United Arab Bank’s (UAB) Long-Term Foreign Currency Rating (LT FCR) and Bank Standalone Rating (BSR) to ‘BBB+’ and ‘bbb-’, respectively, from ‘BBB’ and ‘bb+’. At the same time, CI Ratings has affirmed the Bank’s Short-Term Foreign Currency Rating (ST FCR) at ‘A2’. The Outlook for the LT FCR and BSR is revised to Stable from Positive. CI Ratings has also raised UAB’s Core financial Strength (CFS) rating to ‘bb’ from ‘bb-’. The Extraordinary Support Level (ESL) of High is affirmed.

The upward revision of the LT FCR and BSR reflects the improvement in the Bank’s key financial fundamentals over the last two years which we believe is sustainable. The decline in NPLs to a moderately low level, good NPL coverage, stronger capital ratios and improving profitability are key factors underpinning the rating action. The Bank’s CFS was raised to reflect the continuing improvement in the Bank’s financial fundamentals.

UAB’s LT FCR is set two notches above the BSR to reflect the high likelihood of the Bank receiving extraordinary support from the government in case of need. The UAE 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 can also expect ordinary support from its principal shareholder, Qatar’s Commercial Bank Q.S.C. (Cb).

The Bank’s BSR is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. UAB’s credit strengths are solid capital ratios following an AT1 issue in 2023, sound asset quality, and good and improving profitability. The principal credit challenges are customer concentrations in loans and deposits, in line with peers, and a high level of short-term interbank liabilities. The slow global economy is also a challenge along with raised geopolitical risk in the region. However, the UAE economy is doing well on the back of favourable oil prices. The CFS is also constrained by the Bank’s small size and limited business diversification.

OPERA 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. The UAE banking sector remained strong in 2023, fuelled by improving macroeconomic performance and high hydrocarbon prices. The banking system is sound with high levels of capitalisation, a moderate level of NPLs, improving profitability and good liquidity.

After several years of balance sheet contraction, during which the Bank’s credit risk profile was strengthened and the business model changed, UAB grew its loan book substantially last year. It is essentially a corporate bank, with retail, treasury and other businesses playing supporting roles. We expect the Bank to remain in growth mode this year particularly given the rise in capital and the good economic climate in the country. However, it remains a very small player in an industry that is dominated by a few large entities. UAB’s corporate franchise is still being built, although its ability to offer customised solutions and its association with Cb are favourable factors. That said, without any advantages of scale and size, building a customer franchise is envisaged to be an uphill task.

Asset quality has improved substantially over the last few years and is currently regarded as sound. Key ratios are better than the sector average. NPLs have declined y-o-y owing to fewer impairments, good recoveries and some write-offs. New loans are governed by tighter underwriting standards with credit policies focusing on lending to high rated entities. Barring an external shock, we expect incremental NPLs to remain low going forward. Stage 2 loans have declined and are presently at a moderately low level. Past due not impaired loans are negligible. We note that NPLs have good loan-loss reserve coverage, with total provisions exceeding NPLs at end-2023 and Q1 24. The Bank’s reported ratio of collateral and provisions to NPLs was 194% in Q1 24. Risk absorption capacity has strengthened with the improvement in profitability and the Bank’s enhanced capital base provides an additional cushion.

Key profitability parameters continued to improve last year due to strong growth in credit and investments, a wider net interest margin (NIM) on the back of higher interest rates, and a significantly lower credit risk charge. UAB’s ROAA, operating profitability and NIM are moderately good though lower than the sector median. Going forward, with interest rates likely to stabilise or fall, margins may not widen as they have in the recent past, however, the impact on net interest income could be partly offset by continuing strong loan growth. Net profit growth in Q1 24 was good and key ratios were maintained at satisfactory levels. The Bank’s lower than peer group margins reflect its corporate banking focus with loans extended mainly to top-rated entities, but the gains from this strategy by way of low credit costs are being realised. UAB has a reasonable level of non-interest income. We expect fee income to rise as the loan book expands and the Bank’s engagement with corporate entities grows. Operating costs rose last year in line with business expansion and ongoing investments in people, products and technology, but the cost-to-income ratio continued to fall with the growth in gross income; the ratio is however still higher than the sector median.

The liquidity profile is acceptable but key ratios are tighter than the peer group median. There is a higher dependence on wholesale funds, particularly short-term interbank liabilities, compared to peers. As a result, the Bank’s net broad liquid asset ratio, CI’s proprietary ratio which serves to highlight the utilisation of short-term borrowings, is very low. That said, we note that the Bank has a sizeable portfolio of other marketable securities (comprising more than a fifth of the balance sheet) which can be disposed of to create liquidity. Moreover, UAB comfortably meets all regulatory ratios, and many ratios are better than those of peer banks.

Customer deposit growth was strong last year, and the CASA ratio improved despite higher interest rates. However, UAB’s customer deposits to total liabilities ratio continues to be one of the lowest in the banking sector. CASA levels remain below those of larger peers, leading to a funding cost disadvantage for the Bank. Customer concentrations are high, in common with other UAE banks with small franchises. Liquidity risks related to this are partly mitigated by the Bank’s access to its major shareholder and to regional and international markets.

UAB’s capital ratios strengthened in 2023, following an AT1 issuance to shareholders and good earnings which were fully retained. The Tier 1 ratio is well above the regulatory minimum with a good buffer and is also better than the sector median. Capital is not impaired and is sufficient to support future growth. The internal capital generation rate has strengthened in recent years on the back of better earnings. No dividends have been paid for several years because of accumulated losses which have declined substantially and are expected to go off the balance sheet by 2025, paving the way for a possible dividend payment in 2026. Shareholders are expected to provide good support for future capital raising activities.

Rating Outlook

The Stable Outlook for the LT FCR and BSR indicates that the ratings are unlikely to change over the next 12 months. We expect key financial parameters to be maintained at least at current levels.

Rating Dynamics: Upside Scenario

An upgrade of the LT FCR and BSR over the next 12 months, or a Positive Outlook, would require a further strengthening of the Bank’s standalone credit profile, a substantial expansion of the customer franchise, improved liquidity ratios, and a more diversified business base making UAB less susceptible to changes in economic cycles.

Rating Dynamics: Downside Scenario

A one-notch downgrade of the Bank’s LT FCR and BSR, or a Negative Outlook, though unlikely, could result from a deterioration in standalone strength. This could be caused by a significant weakening of liquidity, asset quality and profitability that the Bank may not be able to correct in a reasonable period.

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information source was used to prepare the credit ratings: public information. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY2019-23. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity 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 principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in July 1994. The ratings were last updated in July 2022. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure.

The ratings have been initiated by CI. The following scheme is therefore applicable in accordance with EU regulatory guidelines.

Unsolicited Credit Rating

With Rated Entity or Related Third Party Participation: Yes
With Access to Internal Documents: No
With Access to Management: Yes

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Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.

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