September 25, 2017 / 12:04 PM / a year ago

Fitch Affirms Union de Banques Arabes et Francaises at 'A-'; Outlook Stable

(The following statement was released by the rating agency) PARIS, September 25 (Fitch) Fitch Ratings has affirmed Union de Banques Arabes et Francaises' (UBAF) Long-Term Issuer Default Rating (IDR) at 'A-', Short-Term IDR at 'F1' and Viability Rating (VR) at 'bb'. The Outlook on the Long-Term IDR is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS AND SUPPORT RATING The IDRs and Support Rating of UBAF are driven by potential support from its largest shareholder, Credit Agricole Corporate and Investment Bank (CACIB; A+/Stable; 47% shareholder), part of Credit Agricole (CA; A+/Stable). Fitch believes that timely financial support would be provided by CACIB in its role as UBAF's reference shareholder, or ultimately by CA, if required. The two-notch difference between CACIB's and UBAF's Long-Term IDRs reflects Fitch's opinion that UBAF is of limited importance to the parent. This takes into account UBAF's limited role in the group and niche franchise, as well as the absence of material synergies with CACIB. This is counterbalanced by the high reputational risk for the parent if UBAF defaults in addition to UBAF's small size, which would only require limited resources of the parent in case of support. UBAF's Short-Term IDR of 'F1', the higher of two options mapping to an 'A-' Long-Term IDR, reflects our view that, as long as it remains a reference shareholder, CACIB will ensure that sufficient liquidity is available at UBAF to meet its needs. VR The company profile of UBAF constrains its VR given its niche trade finance franchise focussed on flows between Europe or Asia and its core markets in the Middle East and North Africa. The outcome of the litigation with the US Office of Foreign Asset Control (OFAC) relating to certain transactions recorded between May 2009 and May 2014 that might be construed as impermissible under US regulations may affect the bank's company profile. A proportionate fine following UBAF's voluntary self-disclosure, which is our base case, would allow UBAF to renew business growth. Alternatively, a large fine would be highly detrimental to the bank's franchise. UBAF booked a EUR17 million provision at end-2016 related to this litigation. UBAF mainly provides letters of credit, guarantees and trade finance-related loans. The strategy followed since 2014 was to reduce credit risk and to improve financial security procedures. However, the bank was able to preserve its expertise and to grow business volume in 2016 despite continuing political turmoil in some of its key markets, which we view positively. UBAF's profitability is a rating weakness. Its business turnaround and litigation costs have resulted in low operating profitability during the past three years, which we do not expect to improve over the short-term. In 2016, the increase in volumes did not translate into additional income due to margin pressure. The bank's main challenge will be to restore operating profitability. UBAF's risk appetite has reduced and the bank is, in our opinion, more conservative than some of its specialist trade finance peers. It has exited certain high-risk countries and clients, notably in correspondent banking and aligned its risk and reporting tools with CACIB's. UBAF's risk appetite nevertheless remains above average due to country risk, which is inherent to the bank's activities. UBAF is exclusively funded by short-term interbank and corporate deposits, mainly denominated in US dollars. The vast majority of trade finance transactions are also short-term and denominated in the same currency. There is little reliance on funding from CACIB/CA other than the availability of contingency funding if required. UBAF's asset quality is satisfactory. The volume of impaired loans to customers and banks was around 3% of gross loans at end-2016, a slight increase from previous years. In parallel, the coverage of impaired loans by specific provisions increased to above 90%, and above 100% when considering the bank's generic country risk provision. Nonetheless, UBAF remains sensitive to event risk due to asset and geographic concentrations. UBAF's capital ratios remain acceptable, but the bank's Fitch Core Capital ratio declined to 16.7% from close to 24% during 2016. This was mainly driven by an increase in regulatory risk-weighted assets following the first-time application of an EU capital requirements regulation's provision on the equivalence of regulatory requirements in third countries. UBAF's equity base remains small in absolute terms (end-2016 FCC: EUR337 million) and therefore unlikely to be able to absorb material shocks without support from the bank's shareholders. RATING SENSITIVITIES IDRS AND SUPPORT RATING The Stable Outlook on UBAF's Long-Term IDR mirrors that on CACIB and CA. UBAF's IDRs and Support Rating are sensitive to a change in CACIB's, and therefore CA's, IDRs. The ratings are also sensitive to a change in UBAF's links to CACIB and could be negatively affected if these weaken, for example because of a sale or material reduction in the ownership stake. VR The bank's VR could be downgraded if UBAF is unable to restore at least acceptable underlying profitability. Sizeable operational losses, including from an OFAC settlement, with no credible plan for restoring capitalisation would also put the VR under pressure. A shift toward a higher risk appetite, deterioration in asset quality, lower capitalisation or less stringent liquidity policies could also trigger a downgrade. Upside for the VR is limited given the bank's narrow business model and the challenging operating environment in the Middle East and Africa. An upgrade would be contingent on a material improvement in revenue generation, leading to satisfactory profitability, while maintaining its sound risk appetite and acceptable capitalisation. The rating actions are as follows: Long-Term IDR: affirmed at 'A-'; Outlook Stable Short-Term IDR: affirmed at 'F1' Support Rating: affirmed at '1' Viability Rating: affirmed at 'bb' Contact: Primary Analyst Francois-Xavier Deucher, CFA Director +33 (0) 1 44 29 92 72 Fitch France S.A.S. 60, rue de Monceau 75008 Paris Secondary Analyst Mahin Dissanayake Director +44 203 530 1618 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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