CPI Financial

The Bank’s good capital adequacy, liquidity and profitability parameters, as well as improving loan-loss reserve (LLR) coverage are major factors supporting the rating. However, CI notes that nearly all of the Bank’s profitability metrics have weakened over the last few years due to the challenging operating environment. This is also true of the peer group.

Tighter sector liquidity in 2015 and in the first few months of 2016 led to a steady increase in funding costs across the sector, and although the banking sector’s liquidity levels are presently comfortable (partly because credit demand remains low) funding costs continue to rise due to higher interest rates (reflecting rising USD interest rates). However, CBD has a competitive advantage in that its large current and savings account (CASA) balances have helped to keep its funding cost lower than the peer group average. The Bank’s rising CASA in Q1 2017 portends well for its funding cost this year. CBD has built multiple revenue streams, which generate a high level of gross income. While income growth was subdued last year and the operating profitability ratio continued to fall, it remained higher than the peer group average. Throughout the recent slowdown, the Bank’s loan book grew at a faster pace than the sector average as it continued to support its traditional customer base of established Dubai-based business conglomerates. CBD’s Q1 2017 performance suggests that the Bank would do well at the operating profit level this year.

Higher provisioning expenses in 2016 and Q1 2017 have impacted CBD’s net profit and ROAA and CI Ratings believes that these key parameters could remain under pressure in the remaining quarters of this year. In common with many banks in the UAE, CBD experienced some increase in impairments in its SME and retail portfolios in 2016. The rise in non-performing loans (NPLs) in the first quarter of this year was largely due to the tightening of internal asset classification norms ahead of the adoption of the IFRS 9 standard next year. This was also the reason why the risk charge rose in Q1 2017. The Bank maintained a 100 per cent LLR coverage ratio (excluding past due not impaired loans over 90 days) at end 2016 and end Q1 2017. However, the ratio remains below the sector average. The Bank holds substantial collateral against its impaired loans and given its good track record of recoveries so far, CBD expects to be able to recover a major portion of its impaired loans.

There continue to be lingering asset quality concerns in the SME and retail portfolios of all the UAE banks. However, CI believes that CBD’s good income generation would be sufficient to absorb any major increase in risk charges. This is one of the factors supporting the decision to maintain the FSR. Moreover, CBD’s watch-listed and past due loans less than 90 days old have declined as a percentage of gross loans, predicting a better NPL ratio going forward. On the negative side, CBD’s NPL ratio continues to be higher than the peer group average and is also higher than those of similarly rated banks. This is partly explained by the fact that the Bank continues to carry fully provided impaired loans on its balance sheet.

CBD’s capital adequacy ratio (CAR) has fallen steadily over the last few years with risk-weighted assets growing faster than regulatory capital. However, both CAR and the Tier 1 ratio are presently at good levels, though below the high peer group average. The Bank’s capital to risk asset ratio is strong and is close to its Tier 1 ratio; the ratio is also better than the sector average, partly reflecting the Bank’s low claims on sovereigns. Both CAR and the Tier 1 ratio are important supporting factors for the FSR.

Liquidity ratios continue to be sound with the growth in credit amply supported by higher customer deposit collections. The Bank has also maintained its net loans to stable funds ratio at a good level and its liquid asset ratio continues to be satisfactory. CBD has diversified its funding base by raising wholesale medium-term borrowings – this has also helped in the management of asset/liability maturity mismatches. However, wholesale borrowings are not large enough to pose a refinancing risk and customer deposits and capital still constitute the bulk of its funding.

The Bank’s moderately high level of customer concentrations in its deposits and loans continue to constrain the ratings, but its ratios are better than those of many of the larger banks. The challenging operating environment, which has led to increased impairments in the SME and retail books of most banks, also constrains the ratings. However, fiscal tightening measures have eased a little in recent periods and there are early signs that business confidence levels are improving.

The Bank’s Long- and Short-term Foreign Currency Ratings are affirmed at ‘A-’ and ‘A2’, respectively. These ratings continue to be underpinned by the Bank’s overall good financials, the demonstrated support of the federal government, and the high likelihood of future support. The Support Rating of ‘2’ is maintained.

A ‘Stable’ Outlook is assigned to all the ratings. CBD has been expanding its balance sheet at higher than market rates and this is likely to continue in 2017. However, the growth rate is unlikely to exceed that of 2016 given that demand for loans remains subdued and that credit standards have tightened. There could be a pick up in demand in the second half of the year in view of the slight easing of government austerity measures in recent months. No major deterioration is expected in the quality of CBD’s credit book. IFRS 9-led changes could adversely impact both net profit and regulatory capital, which the Bank is adequately placed to absorb. The immediate effect of this on ratings would be minimal since the underlying financial fundamentals of the Bank are likely to be unchanged. However, a significant reduction in capital ratios to levels below those of similarly rated banks in the region could put some pressure on the FSR.

CBD was established as a public limited company in 1969. It is one of the oldest local banks in the UAE with a well-established corporate banking franchise, a strong reputation in the trade finance segment, and a growing retail business. The Bank has widened its product range, added new businesses, and strengthened its corporate banking skill sets. The Dubai government currently has a 20 per cent stake, while prominent Dubai-based business groups hold a large part of the remaining shares. CBD’s AED 64 billion ($17.4 billion) balance sheet at end 2016 places it among the mid-sized banks in the country.