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United Arab Bank - Financial Strength Rating is raised; other ratings are affirmed.

Capital Intelligence (CI) has announced that it has raised the Financial Strength Rating (FSR) of the UAE's United Arab Bank (UAB) to 'BBB+' from 'BBB', with the Bank's rising loan-loss reserve (LLR) coverage ratio and continuing strong profitability being major supporting factors.

CI also notes the UAB's loan-based liquidity ratios had improved at end 2013 and despite the worsening of key ratios at the end of the first quarter of 2014, the trend has reversed and end 2014 ratios are likely to show further improvements. The Bank's small balance sheet, customer concentrations in the deposit base (although the progress here is also noted), tighter than peer group liquidity and lurking challenges in an otherwise improving operating environment are the major constraining factors. The Outlook for the FSR reverts to 'Stable' from 'Positive'.

UAB's Foreign Currency Ratings are affirmed at 'BBB+' Long-Term and 'A2' Short-Term with a 'Stable' Outlook; the ratings reflect the Bank's ownership and management by Commercial Bank of Qatar (CBQ), as well as the strength of the balance sheet. The Support Rating is unchanged at '3' signifying a high likelihood of support from shareholders and the federal government in case of need.

The Bank's loan book has grown substantially above the market average over the last few years. While this raises some asset quality concerns, given the continuing challenges in the economy, there are mitigating factors. These include the Bank's strong credit underwriting processes, its strategies emphasising product and sector diversification (which have resulted in lower customer concentrations) and lending policies focusing on credit to affluent individuals and to carefully selected medium-sized entities. UAB's asset quality ratios are sound overall. Its non-performing loans (NPLs) are at a low level and are fully covered by LLRs.

The Bank's capital adequacy ratio (CAR) has fallen in recent years due to the substantial growth in risk-weighted assets (RWAs). Although the ratio is now below the sector average, it is still at a good level -particularly considering that the Bank's impaired loans are substantially covered by LLRs. However, the falling CAR would restrict asset growth this year. Management is committed to maintaining the CAR at a good level and may consider raising new equity if required. UAB reduced its cash dividend for 2013 to conserve capital.

UAB's key liquidity ratios continue to be tighter than the peer group average, although there were improvements at end 2013, owing to strong growth in customer deposits, increased capital and a small amount of medium-term funds raised last year. Liquid and quasi-liquid assets against which the Bank can raise funds from the Central Bank were at moderately good levels. The Bank also has access to funding from its largest shareholder, although it has never needed to draw upon its lines. Management intends to gradually strengthen liquidity ratios over the coming quarters.

UAB's tighter liquidity has partly contributed to its high profitability, which continues to be among the best in the UAE banking sector, owing to wide net interest margins (NIMs), strong growth in business volumes, high non-interest income (NII) and good cost management. The Bank's operating profitability ratio and return on average assets (RO) have historically been much higher than the peer group average.

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Publication:CPI Financial
Date:Jul 10, 2014
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