July 13, 2017 / 5:19 PM / in 5 months

Fitch Affirms Al Hilal Bank's IDR at 'A+'; Downgrades VR to 'bb-'/RWN

(The following statement was released by the rating agency) PARIS/LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based Al Hilal Bank's (AHB) Long-Term Issuer Default Rating (IDR) at 'A+' with Stable Outlook, Short-Term IDR at 'F1', Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A+'. The Viability Rating (VR) has been downgraded to 'bb-' from 'bb' and placed on Rating Watch Negative (RWN). A full list of rating actions is at the end of this rating action commentary The downgrade of the VR reflects deterioration in the bank's asset quality and high exposure to problem financing, highlighting weaknesses in underwriting standards. Capital ratios are declining and considered weak in light of the bank's high financing book concentration and asset quality problems. Capital generation is also constrained by high non-financing expenses and impairment charges. There has been high management turnover and while the newly-appointed management has relevant experience to run the bank and is actively addressing key shortfalls, it will take some time for the bank's strategy to be fully implemented and yield results. The RWN on AHB's VR reflects the potential for further downgrade if the bank fails to implement its restructuring plan, reduce its problem financing ratio, cut its cost base and raise sufficient core capital in 2H17. KEY RATING DRIVERS IDRS, SR, SRF AND DEBT AHB's IDRs, SR and SRF are driven by an extremely high probability of support from the UAE and Abu Dhabi authorities if needed. This considers the bank's significant Abu Dhabi government ownership, which offsets its lower systemic importance in the UAE. Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and on-going revenues mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector relative 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. AHB's SRF is at Abu Dhabi banks' SRF for domestic systemically important banks (D-SIB) of 'A+. Abu Dhabi banks' D-SIB SRF is one notch higher than other UAE banks, due to Abu Dhabi's superior financial flexibility. The sukuk issued under AHB's sukuk vehicle (AHB Sukuk Company Ltd) are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR AHB's VR reflects the bank's weak asset quality and profitability, high financing book concentration, low capital ratios and small domestic franchise. The VR also factors in AHB's adequate funding and liquidity. AHB's asset quality metrics deteriorated in 2014 and further in 2015 with the impairment of two of its largest exposures. The impaired financing ratio (NPF) was 8.4% at end-2016, higher than the average of rated UAE peers. The bank's asset quality has deteriorated further in 2017 with a sharp increase in the more than 90 days past due, resulting in a high total problem financing ratio above peers. The financing book is highly concentrated, with the 20 largest exposures representing 3.4x the bank's Fitch Core Capital (FCC) at end-2016, higher than UAE peers. AHB's profitability is weaker than peers, impacted by high impairment charges, a high cost base and low fee income generation constrained by its relatively undiversified business model. The cost to income ratio (64% in 2016) is significantly above peers. The bank is targeting a reduction in its cost to income ratio in 2017, but Fitch believes this might be difficult to attain without the bank improving its revenue generation. Impairment charges absorbed 75% of the bank's pre-impairment operating profit in 2016, resulting in 3.4% return on equity, strongly below its peers' average. AHB's capitalisation is weak, especially in light of its asset quality deterioration and high financing book concentration. Capital ratios have been on a declining trend since 2014, impacted by high impairment charges. The FCC ratio dropped to 9.5% at end-2016 below UAE peers average. The Tier 1 capital ratio was higher at 14.6% at end-2016, supported by a AED1.8 billion Tier 1 sukuk issuance. Fitch believes AHB's capitalisation will come under further pressure if it fails to raise sufficient core capital to boost its capital ratios. AHB has adequate liquidity with liquid assets including cash balances, interbank placements and investment securities maturing within a year covering 18% of total deposits at end-2016. The financing to deposit ratio increased to 108% at end-2016 due to 7% growth in the financing book. We expect the ratio to drop as the bank is not planning on financing book growth in 2017. The deposit base is more concentrated than peers, given the bank's small domestic franchise. The 20 largest depositors accounted for a significant portion of the total deposit base at end-2016 and were largely related to the Abu Dhabi government and its GREs given the bank's ownership and its close ties to the government. The bank's strategy focuses on conservative underwriting standards, steady balance sheet growth, deleveraging and capital ratios preservation, higher liquidity, further diversification of the funding base, and reducing the cost base. In assessing AHB's ratings, 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, SR, SRF AND DEBT AHB's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE and Abu Dhabi authorities and on their propensity to support the banking system or the bank. The sukuk issued under AHB's sukuk vehicle (AHB Sukuk Company Ltd) is subject to the same sensitivities as the bank's IDR. VR Resolution of the RWN will depend on the bank's success in improving its asset quality ratios (possibly through the settlement of some large impaired financing), raising sufficient core capital to increase its capital ratios significantly, reducing its high cost base, and starting restructuring as part of the bank's strategy. Following the resolution of the RWN, AHB's VR will remain sensitive to further deterioration in asset quality, capitalisation and profitability. Upside is currently limited unless there is a solid track record of improvement in its asset quality metrics and a reduction in its financing concentration. The rating actions are as follows: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' VR downgraded to 'bb-' from 'bb'; placed on RWN Support Rating affirmed at '1' Support Rating Floor affirmed at 'A+' AHB Sukuk Company Limited: Trust certificate issuance programme affirmed at 'A+'/'F1' Senior unsecured certificates affirmed at 'A+' CRITERIA VARIATION: Under Fitch's Global Bank Rating Criteria, Fitch's SRFs are based on the ability and propensity of the government to provide support. Within the UAE, Fitch assesses the potential for support at federal level as Fitch believes that support would be forthcoming from the UAE authorities acting together. However, in respect of Abu Dhabi, Fitch has varied the criteria to reflect the superior financial flexibility of the Abu Dhabi authorities. As such, the SRFs for banks in Abu Dhabi are based on Fitch's assessment of the ability and propensity of the Abu Dhabi authorities to provide support in its own right. This results in a one notch higher SRF for Abu Dhabi banks (compared with other UAE banks), and results in a one notch higher rating for the bank. 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. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Sukuk (pub. 16 Aug 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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