Key Rating Drivers – IDRs, Support Rating and Support Rating Floor
NBAD’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s belief that there is an extremely high probability of support from the government of Abu Dhabi (‘AA’/Stable/’F1+’) in the first instance, and also from the UAE authorities, if required. This is based on NBAD’s importance to Abu Dhabi and to the UAE banking system, the bank’s majority (70.3%) ownership by – and close ties to – the Abu Dhabi government, and the UAE authorities’ long record of support for domestic banks.
Liquidity support and term funding have been provided by the UAE authorities to all the local banks in the system. In 2013 NBAD completed repayment of the Dhs5.6bn it received as support from the UAE Ministry of Finance, which was due in 2016. In addition, the Abu Dhabi authorities separately injected perpetual hybrid Tier 1 capital into the leading Abu Dhabi banks in 2009 – NBAD received Dhs4bn – to further support capital, which we consider a strong statement of support.
Rating Sensitivities – IDRs, Support Rating and Support Floor
The IDRs, Support Rating and Support Rating Floor are sensitive to Fitch’s view of the creditworthiness of the UAE and Abu Dhabi authorities, and to Fitch’s view of their continuing propensity to support the banking system in general and NBAD in particular. The Stable Outlook indicates Fitch does not consider it likely there will be any change in either ability or propensity to support NBAD.
Rating Drivers -VR
The Viability Rating reflects the bank’s strong franchise, especially in Abu Dhabi; the strength of its management, its close links to the Abu Dhabi government, which benefit both its lending and its funding profile; its consistently sound profitability; and its relatively sound asset quality, despite some deterioration. The main constraint on the rating is NBAD’s significant level of concentration, both in loans and deposits (despite the fact that these concentrations are largely to Abu Dhabi government related entities) in addition to risks inherent in the UAE operating environment.
NBAD achieved strong growth in profitability both in 2012 and in Q113, with net income up by 17% and 35% year-on-year respectively. Performance was driven by strong revenue generation across the board, with net interest income, fee income and investment income all contributing.
Loan quality weakened in 2012 and again – though slightly – in Q113, with impaired loans net of interest in suspense rising to Dhs5.9bn at end-Q113 (2012: Dhs5.7bn). Despite the increase, the bank’s impaired loan ratio of 3.4% at end-2012 (3.5% at end-Q113) still compares reasonably well with that of its peer group, partly because of NBAD’s high level of government-related lending, which is of comparatively solid quality.
Reserve coverage remained at a satisfactory 95% of impaired loans. NBAD has consistently predicted gently rising impaired loans peaking at – or below – 3.75% of total loans, and so far all indications seem to confirm the bank’s expectations. With high coverage levels and strong profit generation, NBAD should be well able to absorb any likely increase in impaired loans.
Liquidity is a key focus for NBAD; the bank’s liquidity management is more advanced than that of many of its peers. Deposits are still the major source of funding. Capitalisation is sound, with regulatory Tier 1 and Fitch Core Capital ratios of 17.2% and 15.3%, respectively, at end-2012. The bank’s Fitch Core Capital ratio does not include the Abu Dhabi government Tier 1 notes mentioned above.
Rating Sensitivities – VR
Downward pressure on the VR could arise from a significant deterioration in asset quality, possibly driven by slower than expected recovery in the UAE and/or on-going problems in the real estate sector.
Given its high level, an upgrade of the VR is unlikely but would be possible; the main upward rating driver would be a significant improvement in the UAE’s operating environment and clear signs of a lasting recovery in the property sector. Any upward pressure would also be contingent on NBAD successfully pursuing its gradual expansion, decreasing concentration levels on both sides of the balance sheet, and showing signs of improving asset quality.
NBAD is the largest bank in Abu Dhabi – and in the UAE – by assets at end-Q113, accounting for around 17% of system assets. It is one of the primary bankers to the government of Abu Dhabi and to public sector companies in the emirate. The Abu Dhabi government owns 70.3% of NBAD’s shares through its domestic investment arm, the Abu Dhabi Investment Council. The balance of shares is widely held. Abu Dhabi remains NBAD’s main focus and largest market, although the bank has a relatively extensive branch network throughout the UAE, and a significant international presence.
The rating actions are as follows:
Long-term IDR affirmed at ‘AA-’; Stable Outlook
Short-term IDR affirmed at ‘F1+’
Viability Rating affirmed at ‘a-’
Support Rating affirmed at ’1′
Support Rating Floor affirmed at ‘AA-’
EMTN programme affirmed at ‘AA-’/'F1+’
Senior unsecured debt affirmed at ‘AA-’
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