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Fitch Affirms National Bank of Ras Al-Khaimah at 'BBB+'; Outlook Stable
July 13, 2017 / 4:23 PM / in 3 months

Fitch Affirms National Bank of Ras Al-Khaimah at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based National Bank of Ras al-Khaimah's (Rakbank) Long-Term Issuer Default Rating (IDR) at 'BBB+' with a Stable Outlook, Support Rating (SR) at '2' and Support Rating Floor (SRF) at 'BBB+'. The Viability Rating (VR) has also been affirmed at 'bb+'. 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 SENIOR DEBT Rakbank's IDRs, Support Rating and Support Rating Floor reflect the high probability of support available to the bank from the UAE and Ras Al-Khaimah 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. Rakbank's Support Rating Floor is two notches below the UAE Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A', due to Fitch's view that Rakbank is less systematically important based on its approximate 2% market share of total assets in the UAE banking system at end-2016, and the bank's niche retail and SME focus relative to other UAE banks. The two senior unsecured notes issued under the bank's medium term note (MTN) programme through its SPV Rakfunding Cayman Limited (100%-owned subsidiary) are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR Rakbank's VR reflects the bank's modest franchise, weakening asset quality, adequate funding and liquidity, acceptable management and strategy, healthy capital ratios and strong , albeit deteriorating, profitability. Rakbank's VR is constrained by the bank's fairly small but well-entrenched retail banking and SME Finance franchise, with limited diversification into wholesale banking, which is a growing focus for the bank. Rakbank's market share of close to 2% of both UAE banking system assets and deposits at end-2016 limits the bank's pricing power and competitive advantage. Rakbank's asset quality is weakening due to sharp deterioration in the bank's SME and Rakfinance segments. Impaired loans and problem loans ratios are high with both ratios increasing steadily over the preceding four-year period. Reserves for impaired loans have improved over the same period with a cover of 84% for impaired loans at end-2016. Rakbank is largely funded by stable customer deposits, which accounted for about 86% of total non-equity funding at end-2016. The deposit base is more granular than peers' due to its retail focus providing a stable funding base for the short- to medium-term. Rakbank complements its deposit funding with two senior unsecured issues, demonstrating good access to capital markets when required. Rakbank has a large stock of liquid assets (cash and cash equivalents, short-term interbank placement and liquid securities) equivalent to 30% of deposits, providing a good liquidity cushion. Rakbank's loans-to-deposits ratio is in line with peers'. Rakbank has stronger capital ratios (the Fitch Core Capital ratio was about 24% at end-2016) than Fitch-rated UAE banks. Strong capital levels are needed due to the bank's exposure to more volatile business segments. At end-2016, the Tier 1 regulatory ratio was 21.8%. The total regulatory capital ratio was 24%. If capital above the minimum regulatory requirement is added to loan loss reserves, then the loan loss reserve/gross loans ratio increases to 13% from 10%, giving a satisfactory capital buffer. Earnings and profitability metrics have been well above average, but have started to deteriorate. Fitch's key earnings and profitability metric, operating profit/ risk weighted assets (RWAs), has sharply declined for the bank to 2.2% from 7.3% over the preceding four years. Over the same period, UAE peers have demonstrated on average a stable 2.2% for the same metric. Rakbank's high margins have not been able to absorb underwriting losses in the bank's core lending with loan impairment charges challenging the bank's superior profitability relative to peers. With the intended further diversification into wholesale lending we expect the bank's margins to continue to reduce, reflecting the contribution of lower-risk, lower- yielding portion of wholesale lending in the bank's portfolio. RATING SENSITIVITIES IDRs, SUPPORT RATING, SUPPORTING RATING FLOOR AND SENIOR DEBT Rakbank's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE and Ras al-Khaimah authorities and on their propensity to support the banking system or the bank. The two senior unsecured notes issued under the bank's MTN programme through its SPV Rakfunding Cayman Limited are rated in line Rakbank's IDRs and are therefore subject to the same sensitivities. VR The VR could be negatively affected by a further deterioration in the bank's asset quality metrics or by a weakening of the capital position due to significant write-offs. The VR could be upgraded if the bank expands its franchise and effectively diversifies its business model. The rating actions are as follows: National Bank of Ras Al-Khaimah Long-Term IDR affirmed at 'BBB+'; Outlook Stable Short-Term IDR affirmed at 'F2' Viability Rating affirmed at 'bb+' Support Rating affirmed at '2' Support Rating Floor affirmed at 'BBB+' Rakfunding Cayman Limited: Guaranteed EMTN programme affirmed at 'BBB+'/'F2' Contact: Primary Analyst Redmond Ramsdale Senior Director +44 20 3530 1836 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Mark Cordwell Analyst +44 20 3530 1644 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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