Global Arab Network | UAE - Fitch Affirms Commercial Bank of Dubai at IDR 'A-' with Stable Outlook

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UAE - Fitch Affirms Commercial Bank of Dubai at IDR 'A-' with Stable Outlook

Global Arab Network - - Mohammed Almasri

Thursday, 06 May 2010 15:01

Fitch Ratings has affirmed UAE-based Commercial Bank of Dubai's (CBD) ratings at Long-term Issuer Default (IDR) 'A-' with Stable Outlook, Short-term IDR 'F2', , Support '1' and Support Rating Floor 'A-'. The Individual rating 'C' remains on Rating Watch Negative (RWN).

CBD's IDRs and Support rating reflect the extremely high probability that the bank would receive support, if needed, from the UAE federal authorities given its strong history of support for UAE banks.

The Individual rating reflects the bank's good profitability and comfortable capital position as well as its modest franchise, weakening asset quality, large concentrations in loans and deposits and the risks arising from the economic downturn in Dubai. The Individual rating will remain on RWN until Fitch has completed its assessment on major Dubai-based banks in light of Dubai World's restructuring request in November 2009.

"The extent to which CBD's exposure to Dubai World may translate into higher loan provisions is as yet undetermined, given that negotiations with the company's creditors are ongoing and the full details of the restructuring proposal are unavailable," said Mahin Dissanayake, Associate Director in Fitch's Financial Institutions team in Dubai.

CBD performed well in 2009 and in Q110 with core earnings holding up despite a fall in lending and rising provisions for loan losses. The bank derives fairly healthy margins reflecting its core focus on the local SME sector and a continuing sharp fall in funding costs. So far rising provisions have been comfortably absorbed by pre-impairment operating revenue, but this may change as if the credit cycle worsens.

Fitch believes CBD's asset quality (2009: NPL at 2.6% of gross loans) is likely to worsen further in the next few quarters. CBD has limited direct exposure to real estate but large sector (mainly construction/real estate and government-related entities) and single-name concentration heightens credit risk.

Liquidity is fairly tight, with CBD's Fitch-calculated loan/deposit ratio at 99.6% at end-Q110 (2009: 104%). Whilst this is common across the UAE, Fitch gains significant comfort from the UAE authorities' liquidity support measures which have proved successful.

The bank is well-capitalised, reporting a Fitch-eligible capital ratio of 15% and a regulatory Basel II capital adequacy ratio of 19% at end-2009. The latter was boosted in 2009 when the bank opted to covert AED1.8bn of deposits by the Ministry of Finance into lower tier 2 capital as allowed by the UAE authorities' liquidity support measures.

Established in 1969, CBD is a Dubai-based commercial bank. It had about 2% of the UAE banking system assets at end-2009. Its main focus is medium-sized UAE corporates and SMEs. The largest shareholder is the government of Dubai (20%).

A credit report on the entity will shortly be available on the agency's website, www.fitchratings.com, under Financial Institutions/Banks/Full Rating Reports.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.

Global Arab Network

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