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Fitch Affirms CBD at 'A-'; Outlook Stable
July 13, 2017 / 6:39 PM / 4 months ago

Fitch Affirms CBD at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based Commercial Bank of Dubai's (CBD) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, and Short-Term IDR at 'F2', Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A-'. The Viability Rating (VR) has also been affirmed at 'bb+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, SR, SRF AND SENIOR DEBT CBD's IDRs, SR and SRF 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 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. CBD's SRF is one notch below the UAE Domestic Systemically Important Banks's (D-SIB) SRF of 'A', due to Fitch's view that CBD is less systematically important. This is based on CBD's 2.5% market share of total assets in the UAE banking system at end-2016, and the bank's niche corporate focus. The senior unsecured notes issued under CBD (Cayman) Limited (100% owned subsidiary) are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR CBD's VR reflects its high problem loans ratio (which includes impaired loans + restructured loans + 90 days past due but not impaired loans), adequate reserve coverage, small niche franchise, adequate management and strategy, average capital ratios, stable funding and liquidity, and declining profitability ratios. CBD's VR is constrained by the bank's weak asset quality. Impaired loans and problem loans ratios are high, despite continued improvement over the preceding four years. Reserves for impaired loans have improved, and covered 102% of impaired loans and 78% of problem loans at end-2016. CBD's sizeable loan concentrations, although a common characteristic for UAE banks, also constrain the VR. CBD has a niche franchise, with a well-entrenched corporate banking franchise, but limited diversification into retail banking, SME finance and Islamic banking. CBD's market share limits the bank's pricing power and competitive advantage (2.5% and 2.8% of total UAE banking system assets and deposits, respectively, at end-2016). CBD has average capital ratios (the Fitch Core Capital ratio was about 14% at end-2016) relative to other Fitch-rated UAE banks. CBD's management intends to keep the total regulatory capital ratio above 14%. At end-2016, the Tier 1 regulatory ratio was 14.6%. The total regulatory capital ratio was 15.8%. If capital above the minimum regulatory requirement is added to loan loss reserves, then the loan loss reserve/gross loans ratio increases to 11.6% from 7.0%, giving a satisfactory capital buffer. Fitch views CBD's funding profile as generally stable. Despite funding concentrations, the deposit base is slightly weighted towards term deposits, and provides a fairly stable funding base for the short to medium term. CBD complements its deposit funding with two issues under the bank's EMTN programme, medium-term repurchase agreements and a syndicated loan, demonstrating good access to capital markets when required. CBD has a large stock of liquid assets (cash and cash equivalents, short term interbank placement and liquid securities) equivalent to 22% of deposits and short-term borrowings, providing a good liquidity cushion. CBD's loans to deposits ratio is in line with peers. Earnings and profitability metrics have been declining, and are now below peers. Fitch's key earnings and profitability metric, operating profit/ risk weighted assets, shows a deterioration of the bank's operating profitability to 1.8% at end-2016 from 2.7% at end-2013. A combination of a narrowing net interest margin attributable to an increase in the cost of funding and rising loan impairment charges have gradually consumed more of the bank's operating profit. RATING SENSITIVITIES- IDRs, SR, SRF AND SENIOR DEBT CBD's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE and Dubai authorities on their propensity to support the banking system or the bank. The two senior unsecured notes issued under CBD's Euro medium-term notes programme via CBD (Cayman) limited are rated in line CBD's IDRs and are therefore subject to the same sensitivities. VR A downgrade of the VR could result from significant deterioration in asset quality leading to weaker capital ratios. An upgrade may result from further diversification of the franchise and a sustained improvement in asset quality. The rating actions are as follows: Commercial Bank of Dubai P.S.C: Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' VR affirmed at 'bb+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Senior unsecured notes affirmed at 'A-'/'F2' CBD (Cayman) Limited: Senior unsecured notes affirmed at 'A-'/'F2' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Mark Cordwell Analyst +44 20 3530 1644 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 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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