Jan 21 - Fitch Ratings has affirmed Dubai Islamic Bank’s (DIB) Long-term Issuer Default Rating (IDR) at ‘A’ and Viability Rating at ‘bb’. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.
RATING DRIVERS AND SENSITIVITIES: IDRs, Senior Debt, Support Rating and Support Rating Floor
DIB’s Long- and Short-term IDRs, Support Rating and Support Rating Floor reflect Fitch’s view that there would be an extremely high probability of support from the UAE authorities, if required. This is based on the bank’s high systemic importance as the UAE’s largest Islamic bank, the strong history of support for local banks from the UAE authorities and the Dubai government’s 30% stake.
The ratings would be sensitive to a change in Fitch’s view of the ability of the UAE to support or of the UAE authorities’ willingness to support.
Senior unsecured issuance, through DIB Sukuk Company Ltd, has the same Long-term IDR as DIB. It has been affirmed and its ratings are broadly sensitive to the same considerations.
RATING DRIVERS AND SENSITIVITIES: Viability Rating
The bank’s Viability Rating (VR) reflects its strong domestic franchise, satisfactory funding and liquidity, and stable profitability. Negative pressure on the VR could occur if there was deterioration in the domestic operating environment and in the bank’s asset quality, or if there was a continuing decline in capital. Upward movement is unlikely considering the weak asset quality, on-going restructuring of large problem loans, the high loan book concentration and the risks inherent in Dubai’s real estate market.
DIB’s net income during 9M12 is in line with the same period in the previous year. Profitability ratios showed improvement on FY11. The cost/income ratio improved slightly due to solid cost management and was in line with its closest peers at 40%. Fitch expects profitability to remain under pressure in the short term owing to high loan impairment charges, the low interest rate environment and regulatory changes, relating to residential mortgages and lending to government related entities.
Fitch expects asset quality to continue to stabilise in the medium term. However, at end-9M12, the bank’s impaired loans/total loans ratio was among the highest of its Fitch-rated peers. This would be significantly higher if assets more than 90 days past due but not impaired were included. DIB is taking steps to reduce this to a more acceptable level. Low loan loss reserve coverage remains a real concern in light of the poor asset quality and high exposure to local real estate, though the level of collateral provides some comfort.
The Fitch Core Capital ratio stood at 14.0% at end-9M12, which Fitch considers low in view of DIB’s weak asset quality, low loan reserve coverage and the uncertain outcomes of several major corporate restructurings. Fitch expects the bank to strengthen capital in the near future.
Funding is underpinned by high levels of retail deposits reflecting its strong Islamic franchise. Consequently DIB’s deposit base is less concentrated than local and regional peers. Despite being largely contractually short-term, these deposits tend to be stable on a behavioural basis. Moreover, a large portion of customer deposits are non-remunerated or low rate, which benefits the bank’s cost of funds.
Fitch considers DIB’s liquidity as satisfactory. The bank’s Fitch-calculated loans/deposits ratio was a healthy 88.6% at end-9M12 and remains one of the best in the UAE. The bank’s liquidity position is also supported by solid levels of highly liquid assets, with cash and bank placements (excluding reserve requirements held with the CBUAE) covering 20% of customer deposits. The bank has also the ability to repo out its large sukuk portfolio, if needed.
DIB is the sixth-largest bank in the UAE and one of the world’s oldest Islamic banks. It is 29.8% owned by the Dubai Government, through the Investment Corporation of Dubai, with other significant stakes held by the UAE General Authority for Pensions and Social Security with 4.3% and the bank’s founding shareholder, the Lootah family, with 7.2%.
The rating actions are as follows:
Dubai Islamic Bank:
Long-term IDR affirmed at ‘A’, Outlook Stable
Short-term IDR affirmed at ‘F1’
Viability Rating affirmed at ‘bb’
Support Rating affirmed at ‘1’
Support Rating Floor affirmed at ‘A’
DIB Sukuk Company Ltd:
Senior unsecured trust certificates affirmed at ‘A’