Fitch Ratings have affirmed UAE-based Dubai Islamic Bank’s (DIB) Long-term Issuer Default Rating (IDR) at ‘A’ with a Stable Outlook, and Viability Rating (VR) at ‘bb’. A full list of rating actions is provided at the end of this rating action commentary.
KEY RATING DRIVERS – IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
DIB’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s opinion that there would be an extremely high probability that support would be provided by the UAE authorities, if needed. This is based on the ability and willingness of the UAE federal authorities to support DIB given its systemic importance as the UAE’s largest Islamic bank and the 30% Dubai government shareholding. Fitch has also considered the authorities’ strong track record of support for the domestic banking system, particularly since the global credit crisis, including the provision of significant liquidity support.
The DIB Sukuk Company Ltd and Tamweel Funding III Ltd trust certificate issuance programmes, and the senior unsecured notes issued under them, are rated in line with the bank’s IDRs and are therefore subject to the same rating drivers. The Tamweel Funding trust issuance certificates are guaranteed by Dubai Islamic Bank.
RATING SENSITIVITIES – IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The bank’s IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch’s view of the propensity or ability of the UAE authorities to provide timely support. An upward revision is unlikely due to their current high level. The trust certificate issuance programmes are subject to the same sensitivities.
KEY RATING DRIVERS – VR
DIB’s VR reflects the bank’s underlying weak asset quality, exposure to problem financing, sizeable loan concentrations and renegotiated loan book, and consequent vulnerability to event risk and potentially high losses. The rating continues to be underpinned by the bank’s strong domestic franchise, comfortable liquidity and funding, predominantly due to its large and stable deposit base and high proportion of liquid assets, and by its adequate capacity to absorb losses through robust pre-impairment operating profit.
DIB’s net income increased 25% yoy in 1H13, due to improved profitability in most business segments. The cost/income ratio remained flat, despite a 16.4% rise in personnel expenses, and was in line with that of its closest peers at 40%. Fitch expects profitability to continue to improve, but that there will still be some pressure in the short term owing to continued loan impairment charges related to legacy loans.
Impaired financing/ gross financing remains elevated at 10.2%. The total NPL ratio would increase to 13.9% if 90 days past due but not impaired loans were added to this figure, which Fitch views as a more accurate reflection of asset quality. Loan loss reserve coverage has gradually improved over the past two years to an adequate 69% at end-1H13 (end-2011: 50%) considering DIB’s high exposure to real estate. The real estate exposure has also been mitigated to a certain extent by the high level of collateral that is held against it. In addition there is a large volume of restructured loans which, while currently performing, may prove problematic again in the future.
DIB is highly exposed to Dubai’s weak real estate sector (including retail mortgages). This is reflected in its large portfolio of renegotiated loans. Fitch believes asset quality will continue to improve, but that the speed of this depends, to a large extent, on the successful restructuring/ rescheduling of several large exposures, and on a sustained recovery in the real estate market, which is showing signs of recovery.
Customer deposits increased 24% in 1H13, mainly due to an influx of government and government-related entity deposits, which may prove to be temporary. DIB’s strong franchise supports its large and stable retail deposit base. Consequently, DIB’s deposit base is typically less concentrated than those of local and regional peers. Despite being largely contractually short-term, these deposits tend to be stable in practice.
Liquidity is comfortable, with DIB’s Fitch-calculated loans/deposits ratio at 72.4% at end-1H13, one of the lowest in the UAE. In addition, the high proportion of liquid assets (mainly cash and interbank balances) enables it to manage liquidity comfortably.
DIB’s Fitch Capital Core (FCC) ratio was adequate at 15.6% at end-1H13, considering its weak asset quality. This does not include its new hybrid Tier 1 issue. Fitch views the issue of the hybrid Tier 1 as positive to which it assigned 50% equity credit, due to the bank’s full discretion to cancel coupons and its perpetual, unsecured and subordinated nature. The UAE central bank Tier 1 ratio, which includes the new hybrid Tier 1 issue, is 18.1%. Fitch expects core capital to remain at current levels as expected loan growth should be compensated by internal capital generation.
RATING SENSITIVITIES – VR
Fitch believes that the VR remains sensitive to any deterioration in asset quality that affects the bank’s capital or profitability. A significant and sustained improvement in asset quality could lead to an upgrade in DIB’s VR.
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 bank is publicly listed and accounts for approximately 6% of total banking assets in the UAE.
In 2013 DIB increased its stake in Tamweel, a UAE mortgage provider, to 87% from 58% and is in the process of delisting Tamweels shares from Dubai Financial Markets.
The rating actions are as follows:
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’
Tamweel Funding III Ltd
Senior unsecured trust certificates affirmed at ‘A’
Source: Reuters
