Fitch Ratings has affirmed Bank of Sharjah’s (BOS) Long-term Issuer Default Rating (IDR) at ‘BBB+’ and Viability Rating (VR) at ‘bb+’. The Outlook on the Long-term IDR is Stable.
BOS’s Long- and Short-term IDRs reflect Fitch’s belief that there is a high probability that support would be forthcoming from the UAE authorities in case of need, given the strong history of support in the UAE and the government of Sharjah’s 15% stake in the bank. A change in Fitch’s view of the willingness or ability of the UAE authorities to provide sovereign support for BOS could change the bank’s IDRs.
The VR reflects the bank’s strong capitalization and good liquidity position, but also its small franchise, high lending concentrations, weakening asset quality and some concerns over related party transactions, although not uncommon in the region.
The non-performing loans (NPLs) ratio remained flat yoy at 2.6% in 2011 and is low by UAE standards. However, in Fitch’s view, this ratio is only part of the story and asset quality is displaying some weaknesses. Past due loans more than 90 days but not impaired doubled in 2011. In addition, there was an increase in rescheduled loans, albeit not unusual in the UAE. Positively, impairment reserves levels were high. However, Fitch believes that the operating environment will remain challenging in the short to medium term, which could lead to further asset quality pressure. Around one-fifth of the loan book is in its Lebanese subsidiary.
BOS’s loans to deposits ratio was a healthy 85% at end-2011 and the bank’s highly liquid assets provide an adequate liquidity buffer against deposit outflows. Concentration risk in BOS’s loan book is mitigated by its good equity buffer. Fitch core capital stood at a high 20.5% at end-2011 and core capital covered one-third of the loan book.
Fitch believes that further loan book diversification, demonstrated recovery on rescheduled loans and an improvement in the operating environment could lead to an upgrade of the VR. Further deterioration in asset quality affecting the bank’s capitalization and profitability could lead to a downgrade of the VR.
Established in 1973, BOS was the first commercial bank incorporated in Sharjah. At end-2011, it had a modest 1% of UAE banking system assets. The bank is primarily a niche corporate bank, operating through four UAE branches and a banking subsidiary in Lebanon.