Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, announced that it has raised the Financial Strength Rating (FSR) of the United Arab Emirate based National Bank of Umm Al Quwain (NBQ) to ‘BBB+’ from ‘BBB’. The upgrade is in recognition of the sustained improvement in asset quality over the last few years and the continuing strong capital, liquidity and profitability ratios. The Long- and Short-Term Foreign Currency Ratings (FCRs) are affirmed at ‘BBB+’ and ‘A2’, respectively. The Support Rating is maintained at ‘2’, denoting a very high likelihood of official support in case of need.
The Bank’s large capital base, solid capital-related ratios and strong liquidity and profitability metrics (despite some decline in 2016) are major factors supporting the rating. CI Ratings notes that the Bank’s asset quality ratios have improved following strong recoveries and some write-offs in H1 2017 but the NPL ratio remains moderately high. The principal factors constraining the ratings are lower than sector average loan-loss reserve coverage ratio (although capital remains a mitigating factor here). Other constraining factors include customer concentrations in loans and deposits (in common with peers), low market share and the heightened credit risks in the country.
Management’s low risk appetite and cautious outlook along with tighter credit underwriting standards and reduced demand from its largest customer base is expected to result in modest credit growth this year. The heightened credit risk environment continues to pose a threat, although the Bank does not have significant exposures to the segments that experienced the severest problems in 2015/2016. The Bank is well positioned to comfortably absorb any IFRS 9 related provisioning that may be required this year. CI expects NBQ’s operating performance to remain sound, although net profit may be impacted if risk charges are high. Financial indicators related to capital could see a decline on account of IFRS 9 related adjustments but key ratios are expected to remain solid. Liquidity ratios are likely to continue to be comfortable. A ‘Stable’ Outlook is therefore appended to all the ratings.
The Bank’s asset quality ratios had weakened in the aftermath of the 2008 global financial crisis and the real estate crash in the UAE. The Bank had focused on remedial management for many years and net credit had contracted over a four-year period, which also contributed to the increase in the NPL ratio over this period. Strong recoveries, some write-offs and fewer NPL accretions led to a decline in the NPL ratio between 2013 and 2016, and there was a further improvement in H1 2017. Moreover, CI notes that the Bank has no restructured loans and that other past due loans less than 90 days old are low. Impaired loans are substantially covered by collateral, which is the reason why the loan-loss reserve coverage ratio is lower than the peer group average; but collateral can take years to realise in the UAE given the country’s lengthy legal processes.
The Bank’s large capital base is an important mitigating factor; capital and provisions together covered NPLs nearly seven times at end 2016 and more than 10 times at end H1 2017. NBQ has maintained its capital adequacy ratio (CAR) at a high level for several years and it continues to be the best in CI’s peer group table. Additionally, the capital to total assets ratio is very high. While capital is sufficient to support a sizeable increase in risk assets, no such growth has been planned as the Bank continues to maintain a cautious outlook. The CAR is therefore expected to remain at a very high level in 2017.
Liquidity ratios improved in 2016 and continued to be good. Customer deposits and capital account for the bulk of the Bank’s funding as a result of which its net loans to stable funds ratio has been very comfortable. The deposit base has a high proportion of medium-term funds and consequently asset/liability maturity mismatches have been low. The Bank also maintains a good level of liquid assets and other marketable securities.
Profitability ratios are strong, underpinned by wide margins, moderate levels of non-interest income and a good cost to income ratio. Operating profits were flat last year due to reduced net interest income, which was in turn attributed to low growth in credit volumes and a narrower margin. However, thanks to reduced operating costs and a strong decline in provisioning expenses, gross profit (before extraordinary items) recorded a strong increase in 2016. In H1 2017 NBQ’s operating profit recorded a marginal year-on-year decline with higher net interest income offset by reduced non-interest income and higher operating costs. A substantial decline in the net risk charge led to a moderately good rise in net profit. Key profitability ratios continued to be strong and were better than in the full year 2016.
With total assets of AED13.7 billion at end-June 2017, NBQ is one of UAE’s smaller commercial banks. It is primarily a corporate banking institution and its client base consists mainly of small and medium enterprises operating in the real estate, construction, trade, and services sectors. The Bank also has a moderate sized retail banking base and offers the full suite of products for this segment. NBQ is 30 per cent owned by the government of Umm al Quwain.