Fitch Ratings has affirmed National Bank of Ras Al-Khaimah’s (Rakbank) Long-term Issuer Default Rating (IDR) at ‘BBB+’ with a Stable Outlook. The agency has also downgraded its Viability Rating (VR) to ‘bb+’ from ‘bbb-‘. A full list of ratings is at the end of this comment.
Rakbank’s IDRs, Support Rating and Support Rating Floor reflect Fitch’s opinion that there is a high probability of external support from the UAE authorities, if needed. The Support Rating considers the bank’s established retail franchise as well as the UAE authority’s record of support for the UAE banking system.
The downgrade of the VR reflects a reassessment by Fitch of the fundamental risks facing the bank, considering its risk appetite and business profile as well as concerns about the large asset and liability maturity mismatch and the level of restructured loans. The VR also considers the bank’s solid and improving capital position, very strong margins and consistently strong net income which provides good capacity to absorb impairment charges as well as the bank’s established retail and SME franchise in the UAE.
A change in Fitch’s view of the willingness or ability of support for Rakbank from the UAE authorities could lead to a change in Rakbank’s IDR. However, Fitch notes the strong history of support in the UAE for the banking system.
Pressure on Rakbank’s VR could come from significantly weaker asset quality or profitability. An improvement in the VR is considered unlikely at this time and would require an improvement in the bank’s asset and liability maturity mismatch, liquidity profile and an improvement in asset quality which would likely require an improved UAE operating environment.
Rakbank’s profitability margins are among the strongest in the region with a net interest margin of over 10% for 2011. Rakbank’s business profile is unique in the UAE due to its focus on retail banking and highly profitable unsecured medium-term lending to SMEs. The bank’s strong profitability should continue to comfortably absorb impairment charges.
Asset quality deteriorated yoy despite the stable NPL ratio which was 2.5% at end-2011. However, even if NPLs and restructured loans are combined Rakbank’s problem loans still compare well with peers.
Rakbank’s capital position is strong and compares well with peers and should continue to provide significant capacity to absorb losses. Internal capital generation remains strong due to the bank’s healthy profitability as well as solid levels of retained earnings which increased 9% yoy.
The bank does not have any long-term funding to match its loan book, which is a concern but is somewhat offset by its granular retail deposit base. Rakbank is almost entirely funded by customer deposits which increased 11.7% yoy and accounted for 95% of total funding. Funding is mainly short term and granular from retail customers but also includes corporate funding and some concentrations. The bank’s loan/deposit ratio was slightly elevated at 102.3% at end-2011.
However, Rakbank remains a net depositor in the interbank market. The bank manages this risk through pricing and has ample capacity to do so. The bank’s liquid assets are made up of available cash and CDs with the CBUAE, net interbank placements and investment securities, which provide adequate liquidity.
Rakbank operates a UAE-wide retail franchise through 31 branches. The government of Ras Al-Khaimah owns 52.3% of the bank. The remaining shares are listed on the
Abu Dhabi Securities Exchange and are widely held.