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Fitch Revises Banca UBAE's Outlook to Negative; Affirms Long-term IDR at 'BB'
December 2, 2016 / 3:37 PM / a year ago

Fitch Revises Banca UBAE's Outlook to Negative; Affirms Long-term IDR at 'BB'

(The following statement was released by the rating agency) LONDON, December 02 (Fitch) Fitch Ratings has revised Banca UBAE's (UBAE) Outlook to Negative from Stable, while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'BB'. The Viability Rating (VR) has also been affirmed at 'bb'. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND VR UBAE's IDRs are driven by the bank's standalone strength, as expressed by the VR. The ratings reflect the niche trade finance franchise of UBAE based on flows between Italy and its core markets in the Middle East and North Africa (MENA) region and high reliance on substantial deposit funding from its majority shareholder, Libyan Foreign Bank (LFB). UBAE has achieved some diversification through other business lines with a few major Italian corporates, SMEs and small regional banks. The Negative Outlook on UBAE's Long-Term IDR reflects growing pressure on the bank's capitalisation, due to modest buffers over minimum regulatory capital requirements, exacerbated by weaker earnings in a low interest rate environment. The bank's performance is also hampered by a high cost base and limited cost flexibility. In addition, UBAE's capital base is small in absolute terms, exposing the bank to event risk from high credit concentrations and operational risks, which are prevalent in trade finance. UBAE has tight underwriting standards and its risks are adequately controlled. The bank has consistently demonstrated sound asset quality, which reflects its long-standing relationships with its clients, including entities related to Libya and LFB. UBAE's concentrated deposits provided by LFB can fluctuate quite significantly, depending on the latter's needs. When available, UBAE invests surplus funds from LFB in liquid assets in Italy and in European markets. Overall, UBAE's liquidity is ample, given the self-liquidating nature of the bank's short-term trade finance transactions and large portfolio of liquid assets. SUPPORT RATING Fitch believes that in case of need, UBAE would first look to LFB for extraordinary support. LFB has over time shown a high propensity to support UBAE, as it views the bank as important to its international network and strategy. However, UBAE's Support Rating of '5' reflects Fitch's view that LFB's ability to provide support cannot be relied upon given the uncertain economic and political environment in Libya. RATING SENSITIVITIES IDRS AND VR The ratings are sensitive to UBAE's capital position and earnings trends. While further earnings deterioration and continuing weak capital ratios would be negative for the VR, a material improvement in core capital would bring rating upside. The concentration of UBAE's portfolio means that ratings are also sensitive to material deterioration in the quality of one or more of the bank's counterparties. Given the bank's high dependence on the parent for funding, the ratings remain sensitive to an unexpected withdrawal of such funding, threatening UBAE's liquidity and challenging the bank's business model. This could happen, for example, if a new regime took over in Libya, including control of central bank operations (LFB is owned by the Central Bank of Libya). Greater diversification of UBAE's funding profile, a material capital increase or significant improvements in Libya's operating environment would bring rating upside if earnings were improving at the same time. SUPPORT RATING UBAE's Support Rating is sensitive to changes in Fitch's assumptions regarding potential support from LFB and may be upgraded if Fitch believes that some support could come from LFB. However, this is contingent on access to LFB as well as sufficient improvement of the economic and political environments in Libya. The rating actions are as follows: Long-Term IDR: affirmed at 'BB'; Outlook Revised to Negative from Stable Short-Term IDR: affirmed at 'B' Viability Rating: affirmed at 'bb' Support Rating: affirmed at '5' Contact: Primary Analyst Mahin Dissanayake Director +44 20 3530 1618 Fitch Ratings Limited 30 North Colonnade, London E14 5GN Secondary Analyst Manuela Banfi Associate Director +39 02 879087 202 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015756 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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