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Fitch Affirms Emirates Islamic Bank at 'A+'; Outlook Stable
July 13, 2017 / 5:08 PM / 5 months ago

Fitch Affirms Emirates Islamic Bank at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based Emirates Islamic Bank's (EI) Long-Term Issuer Default Rating (IDR) at 'A+' with Stable Outlook, Short-Term IDR at 'F1' and Support Rating (SR) at '1'. 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, SR AND DEBT EI's IDRs and SR reflect Fitch's view that EI is a key and integral subsidiary of its 99.9% shareholder, Emirates NBD (ENBD; A+/Stable/F1). ENBD's IDRs are based on potential support available from the UAE and Dubai authorities, if need be. In Fitch's view, this support would flow through to EI given EI's role and track record in the group (offering retail, SME and small corporate Islamic finance services for the group), the very high reputational risk to ENBD of an EI default, as well as the Central Bank of United Arab Emirates' (CBUAE) inclination to favour support as EI operates in the same home market as ENBD. The three Sukuk issued by EI Sukuk Company Limited (100% owned subsidiary) are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR EI's VR reflects the bank's high impaired financing ratio, moderate capital ratios, variable profitability, acceptable management and strategy, and adequate funding and liquidity profile. EI's VR has been constrained by the bank's weak asset quality. EI's asset quality metrics have continued to show modest deterioration. The impaired financing ratio increased to 9.1% at end-2016 (8.8% at end-2015) with reserve coverage improving over the same period increasing to 97% from 90%, due to additional reserving requirements under IFRS 9. EI has a relatively diversified balance sheet through its focus on retail and SME financing. However, the financing book remains concentrated on single-name exposures (the top 20 exposures represented 1.1x of total equity at end-2016). EI's capital ratios (the Fitch Core Capital ratio was about 15% at end-2016) are now more in line with other Fitch-rated UAE banks. Improvement in EI's capital ratios during 2016 can be attributed to the parent's capital injection of AED1.5 billion via a rights issue, which is the second equally sized rights issue to take place in the last four years. At end-2016, the Tier 1 regulatory ratio was 14.9%. The total regulatory capital ratio was 16.1%. If capital above the minimum regulatory requirement is added to loss reserves, then the loss reserve/gross financing ratio increases to 13.3% from 8.8%, giving a moderate capital buffer. Earnings and profitability metrics have been variable and track below peers. Fitch's key earnings and profitability metric, operating profit/ risk weighted assets, demonstrates the variability of the bank's operating profitability, ranging from 0.2% to 1.5% over the last four years. Over the same period, UAE peers have demonstrated on average a stable 2.2% operating profit/ risk weighted assets. A combination of large financing impairment charges relative to operating profit, and an above average (but improving) cost to income ratio explains why EI's overall profitability has been and is likely to remain below the industry average. EI is largely funded by stable customer deposits, which accounted for about 82% of total non-equity funding at end-2016. The deposit base is less concentrated than peers due to its retail focus providing a stable funding base for the short to medium term. EI has complemented its deposit funding with three Sukuk issues, demonstrating good access to capital markets when required. EI has a large stock of liquid assets (cash and cash equivalents, short term interbank placement and liquid securities) equivalent to 40% of deposits, providing an adequate liquidity cushion. EI's financing to deposits ratio is in line with peers. In assessing EI's ratings, 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, SR AND SUKUK EI's IDRs and SR are sensitive to a change in ENBD's IDRs. Unless its importance to ENBD diminishes, EI's IDRs will remain equalised with ENBD's. As such, the Stable Outlook on EI's Long-Term IDR mirrors that on ENBD. In turn, ENBD's IDRs are sensitive to a change in the UAE and Dubai authorities' ability or propensity to provide support. The three Sukuks issued via EI Sukuk Company Limited are rated in line with EI's IDRs and are therefore subject to the same sensitivities. VR The upside for the VR could arise from improvements in the underlying asset quality and capital ratios. Further evidence of EI implementing its strategy and growing its financing book with no material deterioration in the bank's risk indicators would also contribute to an upgrade. The rating actions are as follows: Emirates Islamic Bank PJSC: Long-Term IDR affirmed at 'A+'; Outlook Stable Short-Term IDR affirmed at 'F1' VR affirmed at 'bb-' Support Rating affirmed at '1' EI Sukuk Company Ltd: Senior unsecured trust certificates affirmed at 'A'+ Guaranteed senior unsecured trust certificates affirmed at 'A+' 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: Rose Connolly, London, Tel: +44 203 530 1741, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Criteria for Rating Sukuk (pub. 16 Aug 2016) here Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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