Fitch assigns stable rating for DIB
Dubai, February 1, 2011
Fitch Ratings has assigned Dubai Islamic Bank (DIB) a long-term foreign currency Issuer Default Rating (IDR) of 'A' with a stable outlook, short-term IDR of 'F1', individual rating of 'C/D' and Support rating floor of 'A'.
The bank's support rating of '1' has been affirmed.
DIB's Long- and Short-term IDRs and Support Rating reflect the extremely high probability of support from UAE authorities, if needed.
Fitch's opinion of likely support is based on the long history of support for banks in the UAE and DIB's leading Islamic franchise and systemic importance as a major retail bank.
The individual rating reflects DIB's strong franchise, earnings power and satisfactory liquidity position. It also considers high concentration risks in financing and investments and weak asset quality. Downside pressure on the individual rating could come from further material deterioration in Dubai's real estate sector.
Fitch believes that Dubai real estate prices have regained some stability, but the situation remains fragile. As more properties reach full development and financing risk is passed to the end-investors, the banks may be faced with a further wave of loan impairments.
Fitch estimates that around half of DIB's financing book is to domestic real estate following the bank's acquisition of a majority and controlling stake in the Dubai-based home finance company, Tamweel (rated 'BB'/RWP/'E'), in Q410.
However, DIB has been reducing its exposure to commercial real estate (to developers, etc) since Q408, a segment that has caused impaired loans (NPLs) to increase sharply in recent periods.
Fitch expects NPLs to continue to increase during 2011, albeit at a lower pace, as problems could also arise in home financing, although default rates are currently low. Adequate reserve coverage and high levels of collateral held are mitigating factors, as long as there is no further substantial decline in real estate prices.
DIB has sizeable exposure to Dubai government and government-related entities (GREs), which raises concerns about concentration risk. However, DIB was not exposed to the Dubai World restructuring and has limited exposure to other GREs that are currently in restructuring talks with banks.
Fitch expects DIB's 2010 profitability to be impacted by rising impairment charges and lower non-financing income. However, pre-provision earnings have been consistently strong, reflecting the robust underlying business and franchise. This provides good loss absorption capacity.
DIB's increasing focus on retail (consumer banking) should result in higher margins and further stability in earnings and compensate for low investment income. With household indebtedness at a relatively high level, risks are high for all retail focused banks.
Fitch considers DIB's funding profile to be a rating strength with customer deposits providing the bulk of its funding needs. Given its franchise, DIB attracts a large proportion of its deposits from the retail segment, ensuring a low cost and stable deposit base. Liquidity is therefore satisfactory, with its Fitch calculated loans/deposit ratio at 85 per cent at end of nine month in 2010. The bank has traditionally kept a high level of liquid assets.
Capitalisation is tight, in Fitch's opinion, given DIB's weaker risk profile. However, capital ratios are above regulatory requirements with the bank reporting a Tier 1 ratio of 12.9 per cent, and the quality of capital is good, with a Fitch core capital ratio of 12.8 per cent at end-of nine month in 2010.
DIB announced in Q410 that it had increased its stake in Tamweel to 58.25 per cent (from 19.8 per cent). The bank also has a 45 per cent stake in Deyaar Development, a major Dubai based real estate developer.-Reuters
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