The Bank’s Long-Term Foreign Currency Rating (FCR) is affirmed at ‘A+’ and the two-notch uplift from the FSR is underpinned by the Support Rating of ‘1’, signifying the extremely high likelihood that the government of the UAE would provide support in case of need in view of the Bank’s large size, systemic importance and its ownership by the Dubai government. The Dubai government and the UAE government have demonstrated support in the past through Tier 1 and Tier 2 capital injections. The Short-Term FCR is maintained at ‘A1’ and the Outlook for all the ratings is ‘Stable’.
The Bank’s solid capital base is a major factor supporting the ratings. ENBD has maintained its Basel II capital adequacy ratio at a strong level over the last several years. CI Ratings notes that this is due to a number of factors, including the large and growing loan exposure to its sovereign, the Dubai government, which is zero risk weighted. ENBD’s large related party exposure, reflecting its significant dealings with the Dubai government, continues to be a constraining factor for the ratings. The Bank is working towards meeting the related party and single obligor limits set by the UAE central bank.
The central bank has announced the transitioning of capital standards to Basel III from end 2017 onwards, with detailed guidelines expected to be available before the end of the year. The market expects that the transition to Basel III will not have a material impact on the existing capital profile of UAE banks with a gradual 10-year transition period anticipated. No major impact on ENBD’s capital is likely from the adoption of IFRS 9 standards this year and CI expects the Bank to maintain good capital ratios in the coming quarters.
ENBD’s high and improving loan-loss reserve coverage ratio continues to be a major supporting factor. The Bank has maintained more than full coverage since end 2015. CI expects the strong coverage ratio to be maintained over the next few quarters. The non-performing loan (NPL) ratio has also declined steadily over the last few years and into H1 2017. However, it remains higher than the peer group average and this along with the still heightened credit risks in the country, despite improvements in recent periods, is cited as a constraining factor. There could be a further improvement in the NPL ratio at end 2017 given that the problems in the SME segment have abated somewhat, and that with the tightening of underwriting standards at the Islamic subsidiary delinquencies have been reduced.
Liquidity ratios are satisfactory. The Bank uses customer deposits to fund its credit book and has a high level of current and savings account balances, which helps to maintain a strong liquidity coverage ratio and contributes to its good funding cost. Short-term interbank liabilities are low. Medium/long-term liabilities provide additional funding support and are at an acceptable level, with maturities spread across a number of years so that refinancing risks appear to be low. Key loan-based liquidity ratios have remained stable in recent periods and are close to the average for the sector. The Bank also has a good level of liquid assets. Asset/liability maturity mismatches are low and better than those of many peers.
The Bank’s strong market position in Dubai, and its large and diversified business base with multiple revenue streams are also supporting factors. Operating profitability ratios have continued to decline in recent periods mainly due to narrowing spreads. This is an industry wide phenomenon and reflects the impact of rising interest rates on the cost of funds, and the competitive pressures restricting the rise in lending rates. The Bank’s non-interest income has also been impacted by the devaluation of the Egyptian pound (in 2016), lower property-related income (in 2016 and H1 2017), as well as reduced miscellaneous income. However, cost cutting measures slowed the growth in operating costs in 2016 and led to a year-on-year fall in H1 2017. Provisioning expenses have also fallen steadily and are close to acceptable levels. Although the operating profit to average total assets ratio has declined it remains at a good level, but is now lower than the peer group average. The return on average assets is strong and continues to be better than the sector average.
With total assets of AED456 billion (USD124 billion) at end H1 2017, ENBD is one of the largest banking groups in the Middle East and North Africa region. The government of Dubai, through the Investment Corporation of Dubai, is the single largest shareholder of ENBD with a 55.8 per cent stake. ENBD’s major business units are Wholesale Banking, Retail Banking and Wealth Management, Global Markets and Treasury, and Emirates Islamic Bank. These, together with subsidiaries and associate companies, provide an exhaustive range of financial products and services. Given the sizeable share of the banking business in Dubai, ENDB remains an important player in the domestic market.