National Bank of Fujairahâ€™s Ratings Affirmed with a â€˜Stableâ€™ Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has affirmed the Financial Strength Rating (FSR) of the UAE’s National Bank of Fujairah (NBF) at ‘BBB+’ in view of the Bank’s solid capital adequacy ratio (CAR), good liquidity ratios, sound operating profitability and moderately good asset quality.
The continuing heightened credit risk in a few market segments, high non-performing loan (NPL) accretions in recent years, a sizeable restructured loan book, and customer concentrations in the deposit base are major constraining factors.
NBF’s Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at 'A-' and 'A2', respectively. The one-notch uplift from the FSR is underpinned by the Bank’s Support Rating of ‘2’, indicating a high likelihood of support from the UAE government in case of need. The FCRs are supported and constrained by the same factors affecting the FSR.
NBF’s large capital base and strong CAR support the ratings. Good earnings and a low dividend payout ratio have contributed to the Bank’s solid CAR and high capital to total assets ratio over the years. Adjustments related to the implementation of IFRS 9 this year are not expected to have a major impact on the Bank’s net worth, however the Bank has the option of raising new AT1 capital and/or converting some of its existing AT1 securities into equity should the need arise.
The Bank’s NPL ratio has weakened, owing to higher impairments in the SME and business banking segments, but remained at a moderately good level. More importantly, although the coverage ratio fell below 100 per cent in the first half of this year, it was nevertheless maintained at a high level through impairment charges, even though this resulted in a decline in net profit and ROAA. That said, CI Ratings notes that both the loan-loss reserve coverage ratio and the effective NPL coverage ratio have fallen steadily since 2015, and that restructured loans have increased and are at a moderately high level. CI believes that there could be a further increase in NPLs in the second half of this year given the challenging economic environment and the ongoing, though reduced, stresses in the SME, retail and business banking segment. In CI’s opinion, the Bank has adequate capital and operating profit to absorb reasonable levels of external shocks.
NBF’s operating profitability ratio continues to be higher than the peer group average, but in 2016 this key metric fell because of a lower net interest margin and despite good cost control. Wide margins and a high non-interest income base generated from multiple revenue streams underpin the Bank’s good operating profitability. However, net profit declined in 2016 owing to higher risk provisioning charges and the Bank’s ROAA fell below the peer group average. We expect net earnings to continue to be under pressure this year from a further rise in the funding cost, which is an industry-wide phenomenon, as well as a high risk charge on account of the challenging operating environment and the adoption of IFRS 9. The operating profitably ratio may fall again but is still expected to be moderately good and remains a supporting factor for the ratings.
NBF’s key liquidity ratios continued to be good at end 2016. Key loan based liquidity ratios strengthened on the back of strong growth in customer deposits. The Bank has a large stock of liquid assets and low levels of short-term interbank liabilities. The funding base is partly supplemented by medium-term borrowings from international markets but the level is not high enough to pose a refinancing risk. Asset/liability maturity mismatches have been low compared to many of its peers.
High customer concentrations in the deposit base, which is an industry-wide feature, constrain the ratings, although CI notes that NBF’s concentration levels have reduced in recent years. The Bank’s high levels are partly attributed to the sizeable funds received from related parties and which have been stable over the last several years. The Bank’s still limited retail banking operations also contribute to the high concentration level. While customer concentrations in net loans are high in the international context, these are likely to be somewhat better than the UAE banking sector median.
The Bank also has high related-party exposures on the balance sheet. However, these are all performing well and have sizeable collateral cover. In addition, liabilities placed by related parties significantly exceed exposures, making related parties a net lender to the Bank. Moreover, NBF is fully compliant with all single borrower and related party borrower directives issued by the central bank. In view of these mitigating considerations, related party exposures have not been cited as a constraining factor for the ratings.
CI believes that NBF’s key financial fundamentals are likely to remain high despite the challenges in the system. There could be some weakening of asset quality and profitability over the next six to twelve months, but the Bank’s strong capital and income generation capability would help it to ride out the economic slowdown. A ‘Stable’ Outlook is therefore appended to all the ratings. The medium-term outlook for the economy is favourable and the Bank is poised to benefit from any uptick in corporate banking activity in the country. However, a significant increase in NPLs accompanied by a worsening of the provision coverage ratio and/or operating profitability could have negative implications for the Bank’s ratings.
The Bank was established in 1982 in the emirate of Fujairah. Its principal shareholders are the Department of Industry and Economy, Government of Fujairah (40.1 per cent) and the Easa Saleh Al Gurg Company LLC (21.7 per cent); the latter belongs to the Bank’s deputy chairman and chairman of the executive committee. NBF is primarily a wholesale bank with strong trade finance and foreign exchange expertise. Its commercial business focuses on medium and small companies. At end June 2017 the Bank had total assets of AED 34 billion (equivalent to $9.3 billion).