Moody's Investors Service has affirmed National Bank of Ras Al-Khaimah's (RAKBANK) global foreign and local currency deposit ratings at Baa1/P-2. At the same time, Moody's has affirmed RAKBANK's D+ standalone Bank Financial Strength Rating(BFSR), mapping to baa3 baseline credit assessment (BCA) on the long term scale. All ratings carry a stable outlook. Moody's also affirmed the (P)Baa1 rating assigned to the bank's senior unsecured MTN program (foreign currency).
Moody's rating affirmation reflects RAKBANK's (i) strong retail and small medium enterprises (SME) lending franchise, which continue to generate stable core earnings (ii) low borrower concentration compared to UAE peers and (iii) consistently strong profitability, asset quality and capitalisation metrics.
RAKBANK is a pure retail bank, with a singular focus on high margin retail and SME lending that has driven growth in assets and profitability since 2007. RAKBANK's net interest margin of nine per cent at end June 2012 is the highest in the UAE banking system.
RAKBANK's concentration numbers compare favourably with most of the UAE peers due to its relatively large retail portfolio (80 per cent of loan book). RAKBANK's asset quality is also strong with a stable problem loans to gross loans ratio of around 2.5 per cent since 2009, which is supported by solid underwriting standards and an aggressive write off policy.
RAKBANK also exhibits strong capitalisation levels, with Tier 1 capital ratio under Basel II at 25.4 per cent and the total capital ratio at 27.7 per cent as of end June 2012. Such high capitalisation ratios are supported by strong profit generation.
RAKBANK's ratings continue to be constrained by its relatively small size, lack of geographical diversification and its narrow market position within a highly fragmented and increasingly competitive banking system. Moreover, the rating also takes into account the bank's significant dependencies on key management staff. Although succession planning is underway, the bank will need to be managed carefully to ensure operational stability during the transition period.
RAKBANK's Baa1 deposit ratings incorporate two-notches of uplift from its BCA, based on Moody's assessment of very high probability of systemic support from UAE authorities in case of need. This assessment reflects: (i) the rating agency's view of UAE as a very high support country, underpinned by clear historical evidence of systemic support for banks; and (ii) RAKBANK's majority-ownership by the government of Ras Al-Khaimah (52.8 per cent).
What Could Change the Rating - Up
The ratings could be upgraded if the bank significantly expands its franchise while maintaining its good asset quality and strong financial fundamentals.
What Could Change the Rating - Down
The ratings could be downgraded as a result of: (i) a sharp and greater-than-anticipated deterioration in asset quality, which erodes profitability and capitalisation; or (ii) significant operational instability during the management transition period.