Fitch Rates Commercial Bank International 'A-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned Commercial Bank International (CBI) a Long-term Issuer Default Rating (IDR) of 'A-' and a Viability Rating (VR) of 'b+'. The Outlook on the Long-term IDR is Stable. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS AND SUPPORT RATING
CBI's IDRs and Support Rating reflect Fitch's view that CBI is a key affiliate of Qatar National Bank (QNB; AA-/Stable/F1+) due to its role as QNB's vehicle for UAE lending, an important market for QNB. They also incorporate Fitch's belief that a CBI default would constitute high reputational risk for QNB as CBI and QNB share the same logo, and the role it plays for QNB. The ratings also reflect our belief that any required support would be easily manageable for QNB given the relatively small size of CBI in relation to QNB. However, our view of potential support is somewhat constrained by QNB's minority 40% stake in CBI, which is the maximum allowed under UAE law for foreign ownership. Fitch believes QNB would be willing to increase its ownership if allowed under UAE regulations.
QNB's IDRs are based on potential support available from the Qatar authorities, if necessary. In Fitch's view, this support would flow through QNB to CBI given the role it plays for QNB.
The Short-term IDR of 'F1'; the higher of the two possible for Long-term IDR of 'A-'; reflects the support available to CBI from its higher-rated parent.
CBI's VR primarily reflects the bank's limited franchise and relatively less diversified business model than peers. It also considers the bank's capital ratios, which Fitch views as weak given the bank's aggressive growth strategy and also relative to the average of UAE peers, as well as its still weak but improving asset quality metrics. The VR also takes into account the clean-up of CBI's balance sheet through the write-off of legacy impaired loans, its tightened underwriting standards, albeit with a still limited track record, and the intrinsic support, including liquidity support, it enjoys from QNB, its largest shareholder.
CBI accounted for less than 1% of total banking system assets and loans at end-2015. However, its partnership with QNB allows it to participate in syndications and big tickets. The bank has been strengthening its balance sheet through write offs in addition to the sale of non-core assets (including investment securities and performing loans). New management is in place, with a more conservative risk appetite focusing on good credit quality and selective uptake of new customers.
CBI's asset quality metrics improved in 2015 following AED1.6bn of write offs. Accordingly, the impaired loans ratio went down to 8% at end-2015 from 16% the prior year and loan loss reserve coverage improved to 81%. At end-1Q16, these ratios improved further to 6.7% and 89% due to recoveries. However, the bank's underlying asset quality remains weak, with an above sector average exposure to the real estate sector and a total problem loan ratio (including impaired loans, PDNI and restructured loans) of 17.6% at end-2015, which Fitch believes is a more appropriate measure of asset quality. The loan book remains concentrated by single-name exposures, particularly real estate exposure, albeit mainly from legacy lending (the 20 largest exposures represented 2.2x of total equity at end-2015). Fitch expects CBI's asset quality metrics to further improve as the bank finishes writing off its legacy impaired loans and tightens its underwriting standards. CBI is planning on strengthening its reserve coverage to 100% supported by its improving operating revenues. These measures should improve the bank's loss absorption capacity.
CBI reported net losses of AED467m in 2015 due to a sharp increase in impairment charges, which was more than double its pre-impairment profit (222% of 2015 pre-impairment profit). Given that CBI has now completed most of the cleaning of its balance sheet and reserve coverage has improved, Fitch expects impairment charges to drop and the bank's operating profit to turn positive, as evidenced by 1Q16 results. The net interest margin (NIM), which stood at 3.4% in 2015, in line with other UAE peers, is expected to decline in 2016 due to downward pressure on pricing and the expected increase in the bank's funding costs.
CBI's capital ratios have been under pressure as revenue generation has not been keeping up with the bank's high loan growth. The bank's Fitch Core Capital ratio declined further to 11% at end-2015 (12% at end-2014) due to the net losses incurred, which is lower than the UAE banks' average. However, total regulatory capital improved to 14.8% at end-2015 from 12.5% in the prior year due to the additional Tier 1 issuance. CBI does not plan to repatriate dividends, which will help strengthen its internal capital generation. However, if revenue generation does not keep up with the bank's planned growth, capital ratios will be pressured further.
CBI is mainly funded by customer deposits, which accounted for 85% of non-equity funding at end-2015. Corporate deposits represented 88% of the total, which makes the deposit base more concentrated than other local peers (the 20 largest depositors accounted for 46% of the total at end-2015). CBI is trying to increase its current and saving accounts, which will help reduce its deposit concentration and funding costs. The bank holds an adequate stock of liquid assets including cash balances, interbank placements and investment securities, which covered 23% of total customer deposits at end-2015.
Despite the shrinkage of the loan book, the loan to deposit ratio increased to 111% at end-2015, higher than the sector average, as the bank reduced deposits by 23% to preserve its NIM. Fitch does not expect the loan to deposit ratio to materially drop from its current level due to the bank's high loan growth target for 2016 and 2017.
IDRS AND SUPPORT RATINGS
CBI's IDRs and Support Rating are sensitive to a change in QNB's IDRs or a change in Fitch's view of CBI's relative importance to its parent. In turn, QNB's IDRs are sensitive to a change in the Qatari authorities' ability or propensity to provide support if needed. At present Fitch considers the likelihood of any change to be small. The Stable Outlook on CBI's Long-term IDR mirrors that on QNB.
Further evidence of CBI implementing its strategy, building its franchise and growing its balance sheet with no material deterioration in the bank's risk indicators could contribute to an upgrade. Upside for the VR could also arise from improvements in the underlying asset quality and capital ratios.
A deterioration in asset quality or capital however could be negative for the VR. A deterioration in CBI's liquidity, if the bank channels its liquidity into growing its loan book, or if its loan to deposit ratio materially increases, would also put pressure on the bank's VR.
The rating actions are as follows:
Long-term IDR assigned at 'A-'; Outlook Stable
Short-term IDR assigned at 'F1'
Viability Rating assigned at 'b+'
Support Rating assigned at '1'.