Fitch Ratings has downgraded the National Bank of Abu Dhabi (NBAD)’s Individual Rating to C from B/C. The Long-Term, Short-Term and Support Rating of the bank have been affirmed at A, F1 and 2, respectively.
The downgrade reflects NBAD's increasing risk profile and a lack of a commensurate strengthening of equity, resulting in a weakening of capital ratios. In a competitive domestic market the bank has been aggressively expanding its share of non-government lending.
The rapid growth of the retail loan book is a particular concern, as the United Arab Emirates (UAE) retail market is relatively immature and has yet to be tested through a full business cycle. NBAD also has a larger proportion of international lending than its peers do, which brings some diversification benefits but also exposes it to other emerging markets and a wider range of global economic risks.
The acquisition of a credit derivative portfolio over the last few years shows that the bank is not averse to moving into new product areas with significantly different risk characteristics to its existing activities. Total risk-weighted assets grew by 19 percent in 2002, whereas the bank's equity base only expanded by 10.5 percent, leading to a reduction in the total capital ratio to 10.8 percent from 11.6 percent at the beginning of the year.
Though NBAD's capital ratio is above the regulatory minimum, it is low by comparison to its peers' and Fitch considers that capital is becoming stretched given the rapid growth in the bank's balance sheet.
On the positive side, the bank continues to report robust profitability in a favorable domestic economic environment. Revenues have grown strongly since 2000, backed by an increase in higher yielding assets, and a steep rise in fee and other non-interest income arising from investment banking activities. NBAD also benefits from its close ties with the UAE authorities and its traditional role as banker to the Abu Dhabi government. The Long-term Rating of the bank is underpinned by the support that Fitch believes would be forthcoming from the government should the need ever arise.
NBAD is the largest bank in the UAE. In addition to an extensive domestic branch network it also has operations in Egypt, Oman, Sudan, Bahrain, London, Paris and Washington DC. It is 73 percent-owned by the Abu Dhabi Investment Authority, the investment arm of the Abu Dhabi government, with the remaining share capital widely held by local investors. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
