Moody's Investors Service has assigned A1 long-term and Prime-1 short-term foreign currency deposit ratings and a D+ financial strength rating (FSR) to National Bank of Dubai PJSC (NBD) (United Arab Emirates). The outlook for the ratings is stable.
The D+ FSR assigned to NBD reflects the bank's modest though improving commercial banking franchise and its good financial fundamentals. NBD is the largest bank in Dubai and the second-largest overall in the UAE, enjoying market shares of around 13% and 6% of total customer deposits and loans, respectively. A traditionally conservative and a predominantly corporate bank, NBD is gradually changing its profile towards becoming a more universal bank, aiming for further franchise and revenue diversification, which Moody's views positively. Its status as the "national bank" of Dubai and its strong and enduring relationship with the Dubai government and ruling family endow the bank with preferential access and a sizeable share of government-related business, in an operating environment where the government is, and will remain for the foreseeable future, the main engine for economic growth and activity.
On the negative side, this relationship results in NBD having a high dependency on fluctuating government-related business, and its resources have been channelled towards servicing this sector, which has prevented the bank from fully developing its private sector and retail banking franchise. Furthermore, the bank has funding and credit concentrations, which Moody's considers as constraining its FSR. Apart from the Dubai government and ruling family, NBD's customer base includes the leading merchant families in Dubai (including some of its shareholders), government-related organisations and corporations, and individuals. In general, the bank is focusing on customers at the middle and upper income levels, and has refrained from targeting the mass retail market.
Moody's notes that the bank maintains a low risk profile and enjoys extremely strong liquidity, with the bulk of its balance sheet invested in liquid, highly rated assets, while loans account for only a low, though growing, proportion of assets. Nevertheless, the opportunity cost for such a strong liquidity position is the level and quality of earnings. NBD is reporting a lower-than-peers recurring earning power, due to NBD's lower yields on its assets, and has a significantly high reliance on earnings from its investment securities portfolio and treasury services, which may not be sustainable at current levels over the medium term. Despite the considerable expansion in its credit portfolio, NBD maintains a superior credit quality with a very low level of non-performing loans. Nevertheless, the bank's growing lending to the real estate and construction sector, coupled with the low granularity in its loan portfolio, is elevating its credit risk profile and represents a significant challenge. Mitigating these concerns is the bank's high, though declining, shareholders' equity ratio that compares well with peers.
NBD's foreign currency deposit ratings are placed at the A1/Prime-1 country ceiling for such instruments in the UAE, based on strong external support should the need arise. Though not majority owned by the Dubai government, NBD's strong and long-standing relationship with the Dubai government, as well as its status as the "national bank" of Dubai, suggest that there is a very strong likelihood that the Dubai authorities would support NBD in case of need. The Dubai government and the Dubai ruling family together hold stakes in NBD, totalling 23%. Furthermore, a number of prominent local merchant and trading families that were among the founding shareholders control another 37% of the bank, the rest being held by a broad base of small shareholders.
All ratings assigned to NBD carry stable outlooks. Going forward, NBD's deposit ratings will be influenced by any movements in the country ceiling ratings, assuming its strong relationship with the Dubai government remains unchanged. The bank's FSR -- which is highly placed within the D+ category -- could benefit from (i) the further strengthening and diversification of the bank's franchise and overall business activities, within an acceptable risk profile; (ii) significant reductions in funding and credit concentration; and (iii) any substantial and sustained improvement in the recurring profitability. On the other hand, NBD's FSR could be lowered if: (i) its earning power and profitability were to decline to levels significantly lower than that of peers; (ii) there were to be a severe deterioration in asset quality, resulting in elevated provisioning requirements; and (iii) there are any signs of significantly increasing funding and credit concentrations.
National Bank of Dubai is headquartered in Dubai and had end-2004 total assets of AED40.3 billion (approximately US$10.9 billion). The bank operates a network of over 30 branches in the UAE, with the majority located in Dubai. Internationally, the bank has branches in London and Jersey, servicing UAE corporations and individuals, as well as offering private banking services to wealthy clients, and a representative office in Iran.
