Capital Intelligence (CI), the international credit rating agency, announced that it has assigned corporate ratings of ‘BBB-’ Long-Term and ‘A3’ Short-Term to Abu Dhabi-based Finance House P.J.S.C. (FH). A ‘Stable’ Outlook is assigned to both the ratings.
The ratings are supported by a strong capital base, good capital ratios, good liquidity ratios and rising profitability. The ratings are constrained by concentrations in the deposit base that stem from FH’s inability to accept retail money, its asset quality weakness in terms of a high non-performing loan (NPL) ratio – albeit with satisfactory loan-loss reserve (LLR) coverage and a small balance sheet. As a non-banking financial company (NBFC), FH lacks a formal lender of last resort, but this is to some extent mitigated by the track record of government(s) in the UAE assisting other NBFCs in the past at times of stress. Although not in itself a constraining factor, the significant securities portfolio does have the potential for introducing some volatility in earnings, although UAE markets have performed strongly in both 2013 and early 2014.
Although FH has only been operating for just under a decade, it has a strong and experienced management team, most of which worked together in senior roles at two leading Abu-Dhabi-based banks. The strength and experience of the management team is also a supporting factor. A NBFC license in the UAE is unusual in allowing holders to offer nearly the same range of products and services as commercial banks. Most NBFCs do not take full advantage of this ability, instead limiting themselves to a restricted range of specialisations, but FH has a rather wider (and growing) range of offerings to both the corporate and retail sectors, together with an investment banking capability.
The crucial success factors for any NBFC are funding and asset quality. In the case of FH, funding is provided by the strong corporate deposit base that more than funds the loan portfolio and which is then backed up by a series of committed (but rarely drawn except for test purposes) short-term bank funding lines. In terms of asset quality, the position is not quite as positive in terms of NPL ratio and LLR coverage, although retail NPLs are almost fully covered, while any gaps between exposure and LLR in the corporate book are covered by collateral.
Finance House P.J.S.C. was established in March 2004 with an initial paid in capital of Dhs200m. As of end-September 2013, paid in capital had risen to Dhs302.5m. FH is licensed and regulated by the Central Bank of the UAE as a Finance Company.
Senior Credit Analyst
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