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Fitch Affirms Noor at 'A-'; Outlook Stable
July 13, 2017 / 5:03 PM / 5 months ago

Fitch Affirms Noor at 'A-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based Noor Bank's (Noor) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook, Short-Term IDR at 'F2', Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A-'. The Viability Rating (VR) has also been affirmed at 'b+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRs, SENIOR DEBT, SUPPORT RATING AND SUPPORT RATING FLOOR Noor's IDRs, SR and SRF reflect the extremely high probability of state support available to the bank from the UAE and Dubai authorities if needed. This considers its significant government and ruling family ownership, which partially offsets its lower systemic importance in the UAE. Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and on-going revenues mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector relative 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 and part government ownership links of a number of banks. Noor's SRF is one notch below the UAE Domestic Systemically Important Banks' (D-SIB) SRF of 'A'. This is due to Fitch's view that Noor is less systemically important based on its 2% market share of total UAE banking system assets and its small domestic franchise. The sukuk issuances under Noor Sukuk Ltd are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR Noor's VR reflects its small but growing franchise, limited track record in implementing its strategy, weak but improving asset quality, high concentration in the financing book, and in this respect low capital levels. The VR also takes into account Noor's adequate liquidity, growing and more diversified customer base, improving profitability and diversified income stream. Noor's VR is constrained by its small but growing franchise as it is still a relatively young bank. Noor grew quickly in Dubai GREs financing, which resulted in weak asset quality and high financing book concentration. The bank is reducing its concentration to GREs as it is moving to a more sustainable balanced franchise and business model. Since the crisis Noor has been diversifying from this type of financing and increasing its focus on retail, trade and growing its fees business. However, it still has a limited track record of implementing its strategy. Noor began its business operations around the start of the financial crisis. The bank's Dubai focus and high exposure to Dubai GREs increased its exposure to problem financing, which has been improving with the recovery of the operating environment. The impaired financing ratio reached 33% at end-2011 and had declined to 5% at end-2016 due to repayments, write offs, successful restructuring and also high financing book growth. However, the total problem financing ratio (impaired financing + restructured +PDNI>90 days) remains above the average of the bank's peers. Noor is diversifying from GREs, but the financing book remains highly concentrated by single name, with the 20 largest exposures representing 3X Fitch Core Capital (FCC) at end-2016. Noor's profitability has been strengthening as it is growing its financing book and improving its fees income through its focus on cross selling and trade financing. Liquidity in the market has tightened, but the bank maintained its net financing margin (NFM) at 2.9% in 2016 as it off loaded some of its expensive term deposits, comparing well with peers. The cost to income ratio is on a declining trend and was 40% in 2016, supported by its strengthening operating income but still higher than UAE peers' average. Financing impairment charges have been declining from the 2011 peak (93% of pre-impairment profit) but increased in 2016 to absorb 64% of pre-impairment as Noor is building its reserve coverage in preparation of IFRS 9 implementation. Noor's FCC ratio dropped to 10.9% at end- 2016 due to high financing book growth, lower than peers. The Tier 1 regulatory ratio improved to 16.3% at end-2016 after the bank completed its USD500 million Tier 1 sukuk issuance. We consider the bank's capital levels particularly low in light of its asset quality and high financing book concentration. Noor has healthy internal capital generation as it does not repatriate dividends. However, if internal capital generation does not pick up with balance sheet growth, the bank would need to raise additional capital to support its capital ratios. Noor has an adequate liquidity profile, which mitigates its high but falling deposit concentration given its small retail franchise. Liquid assets including cash balances less mandatory reserves, interbank placements and investment securities maturing within one year covered 28% of total deposits at end-2016. The financing to deposit ratio increased strongly to 93% at end-2016 (76% at end-2015) due to 13% financing book growth coupled with a 7% drop in deposits to preserve its margins, but still compares well with peers. We expect the ratio to drop in 2017 as the bank grows its deposits base with less pressure on its funding costs as liquidity started to improve in 1Q17. In assessing Noor'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, SENIOR DEBT, SR AND SRF Noor's IDRs, SR and SRF are sensitive to any change in Fitch's view of the creditworthiness of the UAE and Dubai authorities and on their propensity to support the banking system or the bank. The sukuk issuances under Noor Sukuk Ltd are rated in line with Noor's IDRs and are therefore subject to the same sensitivities VR Upside could arise from further evidence of Noor growing its franchise, diversifying its business model away from GREs and building a track record with no material deterioration in the bank's risk indicators and asset quality. The VR could be downgraded if there was a material deterioration in asset quality further impacting the bank's profitability and capitalisation. The rating actions are as follows: Long-Term IDR affirmed at 'A-'; Outlook Stable Short-Term IDR affirmed at 'F2' VR affirmed at 'b+' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A-' Noor Sukuk Company Limited: 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 Zeinab Abdala Associate Director +971 4 424 1210 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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