Commercial Bank International’s Ratings Affirmed with a Stable Outlook

(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 Commercial Bank International (CBI or the Bank) at ‘BBB+’ and ‘A2’ respectively. At the same time, CI Ratings has affirmed CBI’s Bank Standalone Rating (BSR) of ‘bbb-’, Core Financial Strength (CFS) rating of ‘bb’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR remains Stable.

Although CBI continues to show weak financial metrics, its LT FCR is set two notches above the BSR to reflect the significant support expected from Qatar National Bank (QNB), a 40% shareholder. QNB’s demonstrated ordinary support in the past was vital in strengthening CBI’s financial fundamentals during its major structural transformation (QNB is rated ‘AA’/Stable by CI). Support is also available from the UAE government (rated ‘AA-’/Stable by CI).

The Bank’s BSR is based on a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The CFS affirmation is supported by sustained sound capital ratios and the expectation of an equity increase through a rights issue later this year. In recent years, investments in staffing, technology and products have strengthened the Bank’s business foundation and improved profitability metrics in 2024 and Q1 25; however, key ratios remain weaker than peers. Any significant improvement in earnings will depend on a capital increase as this will fuel business activity. Sound liquidity is a positive factor, though key ratios are still tighter than the sector median despite improvements. The Bank’s ongoing weak asset quality, coupled with low loan-loss reserve (LLR) coverage, weighs heavily on the CFS rating. Additional challenges include an impaired capital base and high customer concentrations in loans and deposits (in common with peers).

The OPERA for the UAE indicates a modest risk profile, reflecting the economy’s reliance on hydrocarbons, moderate institutional strength, and limited monetary policy flexibility. Economic risk is somewhat reduced thanks to Abu Dhabi’s support to the federation and the significant buffer of external assets managed by sovereign wealth funds. The UAE banking sector stayed robust in 2024 and Q1 25, characterised by high capitalisation levels and relatively low NPLs. A global slowdown driven by US tariff policies threatens international trade, while prolonged regional conflicts could dampen the UAE’s investment outlook. Currently, the UAE economy, especially the non-oil sectors, continues to perform well despite elevated regional geopolitical risks.

The Bank’s current business model focuses on high-quality, large corporations and high net worth retail clients, with strategies that emphasise digitalisation and technology investments that could lead to better earnings quality in the future. Presently, CBI’s customer base is small and not very diverse, but if the Bank effectively implements its strategies, it could grow its scale and take advantage of market growth opportunities. However, it will need additional capital to support this expansion.

There are encouraging signs concerning asset quality. NPLs increased only slightly in 2024 due to recoveries and a reduced transfer rate to Stage 3, while gross loans grew at a steady pace, leading to a decrease in the NPL ratio, which remains high. The NPL ratio rose in Q1 25; however, recoveries are expected this year, and if gross loans increase after a planned rights issue later in the year, the NPL ratio could decline by year-end. NPL accretions have been low over the past two years, indicating an improvement in credit quality. Additionally, new loans are mainly being granted to top-tier corporate clients and through mortgages to affluent individuals; this could lower loan yields, but credit risks are also comparatively reduced. The Stage 2 loans to gross loans ratio decreased last year to a still moderately high 10%.

The Bank needs to boost its LLR coverage ratio, which remains quite low partly due to its reliance on collateral; provisions and collateral together surpass NPLs. The central bank now mandates banks to discount the value of collateral held against NPLs over five years, which will likely increase provision expenses in the coming years. Currently, the Bank’s operating profit is insufficient to cover a substantial rise in risk charges. In 2024, net NPLs after provisions were over four times the Bank’s operating profit, and the ratio of provisions to operating profit is high. Nonetheless, the improved profitability over the past three years suggests a stronger capacity to absorb future credit losses. The capital buffer is also improving.

Unlike peer banks, CBI did not benefit from the high interest rate environment of 2022 and 2023, as its business growth was slow during that period due to delays in raising capital. Additionally, its net interest margin (NIM) declined during this time – contrary to industry trends – because of rising funding costs and a shift in the business mix towards top-quality corporate loans, which have lower yields. While operating profitability and ROAA improved in 2024 (despite a fall in the NIM), this was mainly driven by a one-time gain from selling real estate properties. Further improvements in operating profitability occurred in Q1 25, thanks to a better NIM, increased fees and commissions, and gains from property sales, though these were partially offset by higher risk charges. Overall, however, profitability remains weak.

In 2024, the Bank’s spreads narrowed due to lower benchmark interest rates, leading to a decrease in net interest income. Unlike last year’s industry trend, CBI’s funding costs improved because of reduced high-cost borrowings and deposits. We also observe a significant growth in core fee and commission income in 2024 and Q1 25, driven by business expansion, which we believe will be sustainable. The cost-to-income ratio is expected to improve with rising operating income, as cost increases remain controlled. Over the medium term, with sufficient capital being made available, we anticipate operating profitability to grow due to credit expansion, higher non-interest income, and better cost efficiencies. However, it may take several years for the ROAA to reach more acceptable levels, and during this period, the Bank could still be vulnerable to external shocks.

Last year’s significant increase in customer deposits, driven by management efforts to market a wider range of liability products, is a positive sign. This improvement has brought CBI’s loan-to-deposit ratio to a more satisfactory level, though it remains tighter than the sector median. Strong deposit growth is central to its growth strategy, and we expect deposits to be sufficient to fund loan expansion in the future. CBI also prepaid some high-cost term borrowings last year, which lowered its wholesale funding ratio to a moderate level and reduced funding costs. The Bank remains focused on increasing CASA balances. The CASA ratio stayed stable last year despite a declining industry trend and increased in Q1 25. However, the Bank’s CASA ratio is still lower than the peer group average. High customer concentration in the deposit base remains a key challenge. Liquidity buffers are sound, and funding support from QNB is available if needed.

In 2024, good earnings in combination with full profit retention and marginally lower risk-weighted assets (RWAs) resulted in the strengthening of all three key capital ratios, bringing them in line with the sector median. However, high levels of NPLs not covered by provisions impair the capital position. The planned capital increase for last year has been postponed to 2025. The Bank requires fresh capital to support higher-risk assets growth that offer better returns. Its high RWA density, caused by past due loans and non-financial assets on the balance sheet, needs reduction to enable the Bank to build high-quality assets. CBI intends to grow its capital by retaining all profits, the latter partly supported by NPL recoveries and the continued sale of non-core assets, including real estate held by subsidiaries.

Rating Outlook

The Stable Outlook indicates our expectation that the ratings will remain unchanged over the next 12 months and is largely supported by the Bank’s strong ownership and the anticipation of increased capital before the end of this year.

Rating Dynamics: Upside Scenario

An upgrade of the BSR and LT FCR or the assignment of a Positive Outlook is likely if there is a significant improvement in the Bank’s standalone profile. This could come from a solid, sustainable strengthening of the Bank’s asset quality and net earnings, along with enhanced capital buffers.

Rating Dynamics: Downside Scenario

A change in the Outlook to Negative or a one-notch downgrade of the Bank’s LT FCR and BSR is possible if capital is not increased, or asset quality and profitability metrics deteriorate over the next 12 months.

Contact

Primary Analyst: Karti Inamdar, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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