Fitch Ratings – Dubai – 09 May 2022: Fitch Ratings has affirmed UAE-based Commercial Bank International’s P.S.C. (CBI) Long-Term Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook and Viability Rating (VR) at ‘b’. A full list of rating actions is below.
Fitch has withdrawn CBI’s Support Rating and Support Rating Floor as they are no longer relevant to the agency’s coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with our updated criteria, we have assigned CBI a Government Support Rating (GSR) of ‘bbb+’.
KEY RATING DRIVERS
CBI’s IDRs are driven by a high probability of support from the UAE authorities, if needed. The Short-Term IDR of ‘F2’ is the lower of two options mapping to a ‘BBB+’ Long-Term IDR, reflecting that a significant part of the UAE banking sector funding is related to the government and a stress on CBI is likely to come at a time when the sovereign itself is experiencing some form of stress.
CBI’s VR reflects the bank’s small franchise, weak and volatile asset quality, exacerbated by high concentrations and problem loans, weak and highly encumbered capital, concentrated funding and weak profitability metrics. It also considers the bank’s adequate liquidity, which benefits from ordinary liquidity support from Qatar National Bank (QNB; A/Stable; 40% stake).
The VR of ‘b’ is below the ‘b+’ implied rating due to the following adjustment reason: weakest link, capitalisation and leverage.
Government Support: CBI’s GSR of ‘bbb+’ reflects the UAE’s strong capacity to support the banking system and its long record of supporting domestic banks. However, it also factors in Fitch’s view of CBI’s lower systemic importance than other domestic banks due to its smaller market share and niche franchise.
Easing Pressures from Pandemic:Pressures from the pandemic and lower oil prices have largely eased. We expect the sector’s credit growth to remain low at 3% in 2022 as credit demand will be constrained by higher interest rates and continuing corporate repayments.
Small Domestic Franchise: CBI has a small franchise and market share in the UAE (about 0.5% of total banking system assets at end-2021). The bank’s business model remains concentrated on higher-risk sectors. Fitch expects benefits from QNB’s shareholding to gradually increase but to remain limited in the short term.
Very High Concentration:CBI’s concentration risk is at the higher end of the UAE banking sector. The top 20 exposures (funded and unfunded) represented a very high 4.8x common equity Tier 1 (CET1) at end-2021, which exposes the bank to event risk.
Weak Asset Quality: CBI recognised loan impairment in the services and construction sectors, leading to an increase in the Stage 3 loans ratio to 19.8% at end-1Q22 (end-2020: 16.3%). Although Stage 2 loans declined, the bank’s problem loans (Stage 2+3) ratio remains at the higher end of the sector. Provision coverage of Stage 3 loans is also very weak relative to peers’.
Weak Profitability; Reducing LICs: Profitability metrics have been volatile through the cycle, due to high loan impairment charges (LICs). The latter declined in 2021, providing an uplift to the bank’s operating profit, but remain high relative to the sector’s.
Weak Core Capital Ratios: CBI has one of the lowest CET1 ratios among Fitch-rated UAE peers. Its core capital buffers are highly vulnerable to asset quality shocks given the bank’s concentration and very high unreserved Stage 3 loans (87% of CET1 at end-1Q22).
Concentrated Funding; Adequate Liquidity: CBI is largely funded by customer deposits, which were about 82% of total non-equity funding at end-2021. Its low reliance on retail deposits (15% of the total) leads to high deposit concentration. CBI’s loans-to-deposits ratio fell to 102% at end-1Q22 (end-2020: 107%). Basel III liquidity coverage ratio stood at a strong 289% at end-2021.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of CBI’s Long-Term IDR would require a downgrade of the GSR. The latter would likely stem from a weaker ability of the UAE government to provide support, as reflected in a downgrade of the UAE sovereign, which is not our base case considering the Stable Outlook on the sovereign rating.
Deterioration of the CET1 ratio to close to 9.5% may result in a VR downgrade. An increase in CBI’s problem loans generation ratio could also lead to a VR downgrade, especially if this is combined with additional impairment charges eroding profitability, and higher capital encumbrance.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action on the IDR would require an upgrade of the bank’s GSR and is unlikely in the short- to-medium term as Fitch does not expect the bank’s systemic importance to significantly increase.
Higher core capital ratios and lower capital encumbrance, likely through a sustained improvement in the bank’s asset quality and profitability, could lead to an upgrade of the VR.
The operating environment score of ‘bbb’ is below the ‘aa’ category implied score due to the following adjustment reasons: size and structure of economy (negative), financial market development (negative), regulatory and legal framework (negative)
The business profile score of ‘b+’ is below the ‘bb’ category implied score due to the following adjustment reason: business model (negative)and market position (negative)
The earnings and profitability score of ‘b+’ is below the ‘bb’ category implied score, due to the following adjustment reason: earnings stability (negative)
The capitalisation and leverage score of ‘b’ is below the ‘bb’ category implied score, due to the following adjustment reason: reserve coverage and asset valuation (negative)and size (negative)
The funding and liquidity score of ‘bb’ is below the ‘bbb’ category implied score, due to the following adjustment reason: deposit structure (negative)
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
CBI’s IDRs and GSR are linked to the creditworthiness of the UAE authorities.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.