Moody's Investors Service has downgraded the long term foreign and local currency issuer ratings of Shuaa Capital by one notch to Ba3 from Ba2 and placed them on review for further downgrade.

The non-prime short term ratings are affirmed.

Ratings rationale

Moody's decision to downgrade Shuaa's ratings and place them on review for downgrade reflects the investment bank's sustained and negative profitability, continued investment write downs, management instability and an increasingly difficult operating environment in their core sectors.

While Moody's notes the strong capital and liquidity positions of the institution, as well as the appointment of new and seasoned management to help restructure this business to profitability, it is expected the rating will be re-positioned to reflect a new business model and the associated risk profile on conclusion of this review.

Shuaa has reported losses for four consecutive years with the reported net loss for the nine month period ending September 2011 at Dh182 million ($49.54 million) and a cost to income ratio for the same period of 581 per cent.

The shareholder's equity has also reduced 42 per cent (from Dh2.2 billion in 2008 to Dh1.3 billion as of the third quarter of 2011). These ongoing losses can be primarily attributed to reduced revenues from all business lines, multiple write downs on their investment book coupled with a very high cost base, although this is being tackled with the recent announced redundancy programme that should materially reduce operating costs once complete during the course of 2012.

"We expect the profitability to remain negative or weak for the near future as the business is being restructured to focus on profitable and sustainable franchises that will take time to build. We expect the commercial finance subsidiary to continue contributing the core of Shuaa's stable operating income going forward," Moody's said in a statement.

On the asset management business, after some prior outflows, amounts under management have shown positive growth and have increased from Dh650 million to Dh950 million as of the third quarter of 2011. Nonetheless building a sizable and sustainable franchise will be difficult given strong competition in the sector and weak regional and global investment environment.

Shuaa's liquid assets comprise 40 per cent of total assets and shareholder's equity to total assets is around 77 per cent as of September 2011 and, as such Moody's notes that these strong liquidity and capitalization metrics of Shuaa are positive factors for consideration during the review process.

As more details of the new operating model, expected performance and ownership structure of Shuaa are disclosed, the rating will be re-positioned at a level more commensurate with the credit risk profile of the new institution. – TradeArabia News Service