July 13, 2017 / 4:43 PM / 2 months ago

Fitch Affirms Abu Dhabi Islamic Bank (ADIB) at 'A+'; Outlook Stable

(The following statement was released by the rating agency) PARIS, July 13 (Fitch) Fitch Ratings has affirmed Abu Dhabi Islamic Bank's (ADIB) Long-Term Issuer Default Rating (IDR) at 'A+', Short-term IDR at 'F1', Viability Rating at 'bb', Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT ADIB's IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support available to the bank from the UAE and Abu Dhabi authorities if needed. Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and recurring revenue mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties with and part government ownership links to a number of banks. ADIB's Support Rating Floor is at the Abu Dhabi Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A+', reflecting the bank's high systemic importance. Abu Dhabi banks' D-SIB Support Rating Floor is one notch higher than other UAE banks, due to Abu Dhabi's superior financial flexibility. ADIB Sukuk Company is rated in line with the bank's IDRs and is therefore subject to the same rating drivers. VR ADIB's VR reflects the bank's strong and resilient UAE-wide franchise, moderate pre-impairment profitability and sound balance sheet liquidity. However, the VR is undermined by weak asset quality and core capitalisation, sizeable balance sheet concentrations and high related-party lending. ADIB has maintained its 5% market share of UAE banking assets. It is the second largest UAE Islamic bank behind Dubai Islamic Bank and the fourth largest Islamic bank globally by total assets. Pre-impairment profitability is solid, at 3.7% of average gross loans in 1Q17, providing the bank with adequate ability to absorb potential credit losses through profits. ADIB's strong UAE-wide franchise is a strength for the bank's funding and liquidity. Customer deposits account for 93% of the bank's total funding base. Liquid assets cover 20% of total assets and 25% of total deposits, and the bank's loans-to-deposits ratio (79% at end-1Q17) compares well with UAE peer average. At end-1Q17 ADIB reported an impaired financing ratio of only 4.2%. However, when adding restructured exposures and 90 days past due but not impaired exposures, the problem financing ratio reached 10.9% at end-1Q17. While the coverage of impaired financing is sufficient at 92%, reserves coverage of problem loans is weak, at just below 35%. In addition, related-party financing accounts for 60% of equity. The major part of this financing is exposure to ADIB's controlling shareholder, translating into high financing concentration, with the top 20 exposures making up 22% of total gross financing. ADIB's Fitch Core Capital (FCC) ratio stood at a low 9.99% at end-1Q17 (compared with a peer average of 14.7%) although an improvement from 8.15% at end-2014 due to an AED504 million rights issue and lower financing growth. ADIB's regulatory Tier 1 ratio was adequate at 15.23% at end-1Q17, while the total capital ratio stood at 15.85%. With these capital ratios the bank could increase financing impairment reserves up to 9.2% of gross financing without breaching the 12% minimum requirement for capital adequacy ratio, which is below the bank's problem financing ratio. In assessing the ratings of ADIB, we considered important differences between Islamic and conventional banks. These factors include closer analysis of regulatory oversight, disclosure, accounting standards and corporate governance. Islamic banks' ratings do not express an opinion on the bank's compliance with sharia. Fitch will assess non-compliance with sharia if it has credit implications. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT ADIB's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE and Abu Dhabi authorities and on their propensity to support the banking system or the bank. The sukuk issued under ADIB Sukuk Company are subject to the same sensitivities as the bank's IDRs. VR Pressure on ADIB's VR could result from deterioration in asset quality or core capital ratios, particularly concerning the recovery of legacy exposures. A sustained improvement in asset quality and capital ratios could lead to an upgrade of the VR. The rating actions are as follows: Abu Dhabi Islamic Bank 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+' ADIB Sukuk Company Limited: Trust certificate issuance programme affirmed at 'A+'/'F1' CRITERIA VARIATION: Under Fitch's Global Bank Rating Criteria, Fitch's SRFs are based on the ability and propensity of the government to provide support. Within the UAE, Fitch assesses the potential for support at federal level as Fitch believes that support would be forthcoming from the UAE authorities acting together. However, in respect of Abu Dhabi, Fitch has varied the criteria to reflect the superior financial flexibility of the Abu Dhabi authorities. As such, the SRFs for banks in Abu Dhabi are based on Fitch's assessment of the ability and propensity of the Abu Dhabi authorities to provide support in its own right. This results in a one notch higher SRF for Abu Dhabi banks (compared with other UAE banks), and results in a notch-higher rating for the bank. Contact: Primary Analyst Eric Dupont Senior Director +33 1 4429 9131 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Nicolas Charreyron Analyst +971 4 424 1208 Committee Chairperson Alexander Danilov Senior Director +7 495 956 24 08 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: rose.connolly@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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