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Fitch Affirms Sharjah Islamic Bank at 'BBB+'; Outlook Stable
July 13, 2017 / 4:58 PM / 5 months ago

Fitch Affirms Sharjah Islamic Bank at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 13 (Fitch) Fitch Ratings has affirmed UAE-based Sharjah Islamic Bank's (SIB) 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 DEBT SIB's IDRs, Support Rating and Support Rating Floor reflect the high probability of support available to the bank from the UAE and Sharjah 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 revenues 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. SIB'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 SIB is less systematically important based on SIB's approximate 1% market share of total assets in the UAE banking system at end-2016, and the bank's niche corporate focus. The sukuk issued by SIB Sukuk Company III Limited (100%-owned subsidiary) under SIB's trust certificate issuance programme are rated in line with the bank's IDRs and are therefore subject to the same rating drivers. VR SIB's VR reflects the bank's modest franchise, high impaired financing ratio, high financing concentration, adequate reserve coverage, as well as acceptable management and strategy. It also factors in the bank's sound funding profile, stable liquidity position, strong capital ratios and consistent profitability. It also takes into account sizeable concentrations on both sides of the balance sheet. SIB's VR is constrained by the bank's modest franchise, although the bank benefits from its close ties to the Sharjah government. SIB's market share is approximately 1% of both UAE banking system assets and deposits at end-2016, which limits the bank's pricing power and competitive advantage. SIB's financing book is characterised by high obligor and sector concentrations. Related-party financing is large, although predominantly to the Sharjah government and related government projects, particularly infrastructure. Impaired financing is high, despite continued improvement over the preceding four years. Reserves for impaired financing have improved over the preceding four years with a cover of 93% of impaired financing at end-2016. SIB has stronger capital ratios (the Fitch Core Capital ratio was about 20% at end-2016) than Fitch-rated UAE banks. SIB's management intends to keep the total regulatory capital ratio above 18%. At end-2016, the Tier 1 regulatory ratio was 20.4%. The total regulatory capital ratio was 21.4%. If capital above the minimum regulatory requirement is added to loss reserves, then the loss reserve/gross financing ratio increases to 18% from 5.6%, providing a satisfactory capital buffer. SIB is largely funded by stable customer deposits, which accounted for about 66% of total non-equity funding at end-2016. Customer deposits are concentrated, with 25% government-related, and have been historically stable. SIB complements its deposit funding with three Sukuk issues, demonstrating good access to capital markets when required. SIB has a large stock of liquid assets (cash and cash equivalents, short-term interbank placement and liquid securities) equivalent to 49% of deposits, providing a good liquidity cushion. SIB's financing-to-deposits ratio is in line with peers'. Earnings and profitability metrics have been stable, but continue to sit below peers'. Fitch's key earnings and profitability metric, operating profit/ risk-weighted assets (RWAs), has been consistent, ranging between 1.8% and 2.1% over the preceding four years. Over the same period, UAE peers have demonstrated on average a stable 2.2% for the same metric. A combination of a lower-risk, lower-yielding financing focus and comparatively higher cost-to- income ratio is why SIB's overall profitability has remained, and is likely to continue, below the industry average. In assessing the ratings of SIB, 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, SUPPORTING RATING FLOOR AND DEBT SIB's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE authorities and on their propensity to support the banking system or the bank. The sukuk issued by SIB Sukuk Company III Limited under the SIB's trust certificate issuance programme are rated in line with the bank's IDRs and therefore subject to the same sensitivities. VR Upside to the VR is limited by the bank's fairly small franchise within the UAE banking sector and concentrated financing portfolio. Downside could arise from deterioration in asset quality affecting the bank's profitability and eroding capital beyond a comfortable level. The rating actions are as follows: Sharjah Islamic Bank: 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+' SIB Sukuk Company III Limited: Senior unsecured trust certificates affirmed at 'BBB+' 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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