Bank of Sharjah’s ratings affirmed

August 6, 2014 9:33 am

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed the Financial Strength Rating of the UAE’s Bank of Sharjah (BOS) at ‘BBB+’; the Bank’s capable management, its strong capital adequacy and liquidity, full loan-loss coverage ratio despite a substantial rise in non-performing loans (NPLs), as well as its reasonably good return on average assets (ROAA) underpin the rating. BOS’s customer concentrations in loans and investments, high related-party exposures and the exposure to low-rated risks overseas through its subsidiary are major constraining factors. The Foreign Currency Ratings are affirmed at ‘A-‘ Long-Term and ‘A2’ Short-Term; the ratings are underpinned by the support of the federal government and the Bank’s overall good financial fundamentals. The Support Rating is ‘2’ in view of the Bank’s ownership by the Sharjah government and the strong likelihood that the UAE government would provide assistance in case of need. The Outlook for all the ratings is ‘Stable’.

For years the Bank’s asset quality ratios were among the best in the banking industry, and the post-2008 turmoil in key sectors of the economy only had a limited adverse impact on the Bank’s credit book. However, in 2013, there was a sizeable increase in NPLs due to cash flow problems (believed to be temporary) suffered by a few business groups operating in the trading and services sectors. Impaired loans continue to be more than fully covered by loan-loss reserves (LLRs), with capital providing an additional though – for the time being – reduced cushion against future shocks. BOS has not changed its basic business model and it primarily continues to work with its core customer base, which is benefiting from the upturn in the economy and the improving real estate market. The credit book is concentrated in the trading, services and manufacturing sectors, but exposures are primarily short-term in nature. Customer loan concentrations and related party exposures are high; however, no impairments have been reported in either the ten largest borrowers or related party exposures. The Bank continues to be very strongly capitalised with a high Tier 1 ratio and low leverage.

Liquidity ratios have historically been very strong owing to management’s conservative outlook. The Bank’s loan-based liquidity ratios have strengthened over the last four years owing to the slow growth in lending, while customer deposits have increased at a good pace. Customer deposits and capital account for the bulk of the Bank’s funding, and short-term interbank liabilities are low. The Bank’s good liquidity is further supported by low – and declining – customer concentrations and low maturity mismatches on its balance sheet.

BOS is a profitable bank, but both ROAA and operating profitability have been below the peer group averages in recent years, owing to high provisioning expenses and low and narrowing net interest margins (NIMs, partly reflecting a high funding cost and large liquid asset holdings). That said, the Bank’s key profitability ratios strengthened in 2013 owing to a substantial increase in investment and property revaluation gains, a higher level of dividend income, and the growth in fees, commissions and foreign exchange income. Q1 2014 results were less than impressive, with operating profit recording a fall over the corresponding period of the previous year owing to the continuing decline in NIM. However, major balance sheet ratios were maintained at good levels, with asset quality essentially unchanged and the capital adequacy ratio (CAR) remaining solid. Although liquidity ratios tightened, these continued to be strong.

BOS is primarily a corporate bank with a customer base comprising top quality local conglomerates. The Bank is essentially a niche player in the corporate banking and trade finance segments of the market. It primarily lends to medium- and large-sized UAE-based companies. BOS operates a small network of branches in the UAE. It has a presence in Lebanon through its majority stake in Emirates Lebanon Bank. The government of Sharjah owns 15% of the Bank’s capital. Other major shareholders are prominent UAE businessmen. With total assets of AED24 billion at end 2013, the Bank ranks among the small-to-medium sized entities in the country.

Primary Analyst
Karti Inamdar
Senior Credit Analyst
Tel: +91 124 2012142

Secondary Analyst
Tom Kenzik
Senior Credit Analyst