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Fitch Affirms Dubai Islamic Bank at 'A'; Upgrades VR to 'bb+'
July 13, 2017 / 3:19 PM / a month ago

Fitch Affirms Dubai Islamic Bank at 'A'; Upgrades VR to 'bb+'

(The following statement was released by the rating agency) PARIS, July 13 (Fitch) Fitch Ratings has upgraded UAE-based Dubai Islamic Bank's (DIB) Viability Rating (VR) to 'bb+'' from 'bb'. Its Long-Term Issuer Default Rating (IDR) has been affirmed at 'A' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. The upgrade of the VR reflects DIB's improved asset quality metrics, supported by the recovery in the real estate sector, and repayments write-offs of and successful restructuring. DIB has also tightened its underwriting standards for real estate financing and its impaired financing ratio (NPF) has been falling consistently since 2011 to 3.7% at end-2016. The VR upgrade also takes into account the bank's diversification away from the real estate sector. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT DIB's IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support available to the bank from the UAE and Dubai authorities if needed. Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and recurring revenue mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties and part government ownership links of a number of banks. DIB's Support Rating Floor is at UAE Domestic Systemically Important Bank (D-SIB) Support Rating Floor of 'A', reflecting its D-SIB status in the UAE and, in particular, Dubai. The sukuk issued by DIB Sukuk Limited (100% owned subsidiary) under DIB's trust certificate issuance programme are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR The VR upgrade reflects the improved asset quality of DIB, its tightened underwriting standards, strong domestic franchise, healthy profitability, as well as sound liquidity and funding, with a large and stable deposit base. It also factors in the bank's sizable financing book concentration and still high, but declining, exposure to real estate. DIB's VR has been constrained by the bank's asset quality with a large stock of restructured financing related to its real estate financing during the crisis. The bank has successfully reduced these exposures supported by the recovery of the real estate sector. Its impaired financing ratio dropped to 3.7% at end-2016 from 10.4% at end-2012 owing to write-offs, recoveries, some classifications back to performing and also financing book growth. The bank's problem financing ratio (impaired financing + restructured financing + 90 days past due but not impaired financing) dropped to 6.7% at end-2016 from 16% at end-2014. DIB tightened its underwriting standards for real estate financing, focusing more on assignment of proceeds from other cash-generating sources and ring fencing-them, and reducing its exposure to project risk. After the crisis, DIB stopped land financing and is now re-lending to the real estate sector but on a selective basis. The bank is diversifying away from real estate by increasing its exposure to strong credit quality government-related exposures (GREs) and the services sector, which is driving its above-market average financing growth. Fitch believes that DIB is not compromising on its underwriting standards for balance sheet growth. DIB has demonstrated sustained healthy profitability through economic cycles. Similar to peers, profitability came slightly under pressure in 2016 from rising funding costs due to tighter liquidity in the market. The net financing margin (NFM) dropped by 40 bps to 3.3% in 2016 but still compares well with peers'. As liquidity improved in 1Q17 and the price war between banks for deposits has slowed down, we expect the bank's margins to stabilise. The bank's cost-to-income ratio is on an improving trend (36% in 2016), supported by strengthening operating income, and compares favourably with peers'. With impairment charges consuming less of the bank's pre-impairment operating profit (9% in 2016), return on equity remains healthy (23% in 2016). DIB issued AED3.2 billion core capital in 2016 to boost its capital ratios, which had been under pressure from high financing book growth. Its Fitch Core Capital (FCC) ratio improved to 14.6% at end-2016 (12.5% at end-2015) and is now in line with the UAE peer average. The Tier 1 regulatory ratio was higher at 17.8% due to AED7.3 billion additional Tier 1 sukuk issuance. Fitch expects DIB's capital ratios to be maintained as financing growth should slow down and we do not expect deterioration in the bank's asset quality. However, if financing growth picks up to its 2014-2015 levels, Fitch expects the bank to raise additional capital to preserve its ratios. DIB's deposit base is less concentrated than peers' as a result of the bank's strong retail franchise. The 20 largest depositors accounted for 34% of the deposit base at end-1Q17. The bank holds an adequate stock of liquid assets (cash balances less mandatory reserves + interbank placements+ investment securities maturing within one year), which covered 22% of its deposits at end-2016. Its financing-to- deposits ratio increased to 98% at end-2016 but is still in line with UAE peers'. However, the ratio is unlikely to increase materially from its current level as Fitch expects financing growth to slow down. Also as liquidity pressures started to ease, we expect DIB to be able to raise additional deposits if needed, given its strong domestic franchise with less pressure on its funding costs. In assessing the ratings of DIB, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT DIB's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the the creditworthiness of the UAE and Dubai authorities and on their propensity to support the banking system or the bank. The sukuk issued under DIB Sukuk Limited are subject to the same sensitivities as the bank's IDR. VR DIB's VR remains sensitive to deterioration in asset quality affecting the bank's capital or profitability or continued high financing growth pressuring the bank's capital ratios. A track record of improved asset quality and a further reduction in single-name and sector concentration could lead to an upgrade. The rating actions are as follows: Long-Term IDR affirmed at 'A'; Outlook Stable Short-Term IDR affirmed at 'F1' Viability Rating upgraded to 'bb+' from 'bb' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A' DIB Sukuk Company Limited: Senior unsecured trust certificates affirmed at 'A' Contact: Primary Analyst Eric Dupont Senior Director +33 1 44 29 9131 Fitch France S.A.S. 60 Rue de Monceau 75008 Paris Secondary Analyst Zeinab Abdalla Associate Director +971 50 550 0296 Committee Chairperson Alexander Danilov Senior Director +7 495 9562408 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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