July 20, 2017 / 3:14 PM / a year ago

Fitch Revises Dunia's Outlook to Negative; Affirms IDR at 'BB'

(The following statement was released by the rating agency) LONDON, July 20 (Fitch) Fitch Ratings has revised Dunia Finance LLC's (Dunia) Outlook to Negative from Stable while affirming the company's Issuer Default Ratings (IDR) at Long-Term 'BB' and Short-Term 'B'. The Outlook revision reflects weakening asset quality, which negatively affected Dunia's profitability in 2016. Fitch expects Dunia's asset quality metrics to remain under pressure throughout 2017. Dunia is a UAE-based finance company, offering smaller-ticket, predominantly unsecured loans, with a particular franchise among salaried expatriates from emerging markets. KEY RATING DRIVERS IDRS The IDRs reflect the balance between the significant exposure of Dunia to credit risk arising from its unsecured lending and the moderate (by finance company benchmarks) leverage under which it operates. Dunia's net impairment charge has approximately doubled in each of the last two years as job losses and wage pressures constrained borrowers' repayment capacities. Simultaneously, loan growth slowed markedly to -2% in 2016 from 34% in 2015 and 47% in 2014. With impairment charges absorbing a materially higher proportion of revenue (72% in 2016, up from 40% in 2015 and 29% in 2014), Dunia's pre-tax profit dropped 67% in 2016 to AED71 million (2015: AED217 million). Management has taken corrective actions in the light of the asset quality deterioration, tightening underwriting criteria, reducing loan sizes and cutting overheads. Provisioning remained consistent in 2016, with all loans written off once 120 days past due, notwithstanding that some may in time yield recoveries on restructured terms. However, Fitch expects heightened impairment to remain a significant drag on earnings through 2017. Mitigants to the credit risks inherent in Dunia's lending are the margins the company charges its customers, and the low, albeit increasing, leverage it maintains. At 2016's significantly reduced level, Dunia's 3.2% ratio of pre-tax income to average assets (2015: 11.5%) was still consistent with a benchmark score above the 'bb' range under Fitch's finance and leasing company criteria. Similarly, Dunia's leverage (as measured by a debt to tangible equity ratio) of 2x at end-2016 (end-2015: 1.8x) was low compared with the 'bb' benchmark range, but appropriate given the performance volatility evident within the loan portfolio. Dunia does not hold a banking licence and the IDRs do not factor in any expectation of state support. However, Dunia is regulated by the Central Bank of UAE and required to observe a minimum capital ratio of 15%, as opposed to 12% for banks. As of 31 December 2016 Dunia's corresponding ratio was well above the requirement, at 31.5% (2015: 33.1%). As a non-bank financial institution, Dunia does not take retail deposits. Funding is principally from corporate deposits, supplemented by bank lines for liquidity purposes. The corporate deposits retain inherent rate and confidence sensitivity, but Dunia continued to make progress in 2016 in increasing the proportion which is non-puttable, and therefore more certain in its length of retention. Dunia's shareholders are Fullerton Financial Holdings Pte (FFH; 40% ownership), a wholly-owned subsidiary of Temasek Holdings Pte Ltd, the Singapore sovereign wealth fund; Mubadala Development Company PJSC (Mubadala; AA/Stable; 31% ownership), a business development and investment company wholly-owned by the government of Abu Dhabi; Al Waha Capital PJSC (25% ownership), a diversified investments holding company, whose main institutional shareholders are Mubadala and Abu Dhabi Investment Company (ADIC); and A. A. Al Moosa Enterprises LLC (4% ownership), a prominent real estate group in UAE. Dunia's ratings do not incorporate any expectation of institutional support, as Fitch regards Dunia as only of limited importance to its shareholders. RATING SENSITIVITIES IDRS Dunia's ratings are most sensitive to further deterioration in asset quality. Should impairment charges fail to stabilise, this would likely result in a downgrade. A weakening of Dunia's liquidity position, for instance as a result of material non-renewal of deposits or other funding lines as they fall due, could also place pressure on the ratings. If impairment ratios return to a level more consistent with those prior to the successive increases of 2015 and 2016, the Outlook could be revised to Stable. Contact: Primary Analyst David Pierce Director +44 20 3530 1014 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Eric Dupont Senior Director +33 1 4429 9131 Committee Chairperson Janine Dow Senior Director +44 203 530 1464 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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