Fitch Ratings has downgraded the Commercial Bank of Dubai (CBD)’s Individual rating to C from B/C. At the same time, the agency has affirmed the bank's ratings at Long-term A-, Short-term F2, Support 2 and Long-term rating Outlook as Stable, stated a press release.
The downgrade reflects the increasingly competitive nature of the United Arab Emirates (UAE)’ banking sector and the challenges CBD faces in defending its franchise and achieving revenue growth in this environment.
The UAE is already considered to be over-banked, and gradual liberalization will allow larger foreign banks to enter the market, increasing competitive pressures. Smaller banks, such as CBD, will be most vulnerable: a few have opted to increase their capital in 2003 to give themselves more weight in the market, though CBD has not yet chosen to go down this route. Consolidation in the sector is looking increasingly likely.
CBD continues to perform very strongly, benefiting from a loyal customer base and a well-established franchise, particularly in the Dubai wholesale trade sector. However, in order to maintain loan growth, the bank has had to relax some of its hitherto conservative lending criteria, for example, by entering the auto finance market in 2002.
Competition for retail lending in the UAE is aggressive and it will be difficult to achieve growth in this area without increasing credit risks. Due to a declining interest rate environment and downward pressure on spreads, CBD's net interest margin has been narrowing, although it remains high by industry standards. As a result, the bank has had negligible growth in net interest income, forcing it to look to fees and commissions to generate increased revenues. Opportunities for raising fees on standard banking products are likely to become more limited in the future as competition in the market intensifies.
The Long-term and Short-term ratings reflect CBD's strong capital ratios, consistent track record and experienced management team, while taking into account some risk concentration in the trade sector and a moderately high level of impaired lending. CBD is a full service commercial bank with a network of branches throughout the UAE. It is 20 percent-owned by the government of Dubai, with its remaining shares widely held by local investors. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
