Fitch rates NBQ at 'BBB+'/'F2'; Outlook Stable

The Support Rating Floor is 'BBB+'. The Outlook for the Long-term IDR is Stable.

NBQ's Long- and Short-term IDRs and Support rating reflect the high probability of support from the UAE authorities should it ever be required, based on the government of Umm Al-Qaiwain's 30% stake in NBQ and the strong history of support being provided to UAE banks. The Individual rating reflects sound capitalisation, good asset quality ratios, improved liquidity and high margins. The rating also considers the bank's small UAE franchise, rapid loan growth from a fairly concentrated portfolio and income statement volatility.

Recent performance has been good despite slower loan growth. Fee income increased in 2007, although the net interest margin declined due to higher funding costs. The bank continues to hold a substantial portfolio of regional equities (Dhs324m) which have made the income statement volatile, although their impact on profitability is slowly reducing. The fair value gain on this portfolio (reflected in the income statement) was Dhs116m in 2007, following a loss of Dhs76m in 2006 and a gain of Dhs144m in 2005. Cost growth is due to higher staff numbers to cope with increasing business volumes and higher living costs as inflation grows in the UAE.

Recent loan growth has been below the average for UAE banks, but was still fairly rapid at 20% in 2007. Asset quality ratios have worsened slightly, but remain good with 2.7% of the book deemed impaired and reserve coverage of 93% at end-2007. The bank updated its liquidity policy in 2007 and held a substantial balance of CDs with the UAE Central Bank at end-2007 (Dhs2.4bn). Funding is predominately from customer deposits, although diversification has occurred through two three-year syndicated loans totalling Dhs1.56bn. Capital adequacy is sound with a Fitch eligible capital ratio of 18% at end-2007 and, with a forthcoming rights issue of Dhs330m and the retention of all of 2007 net income (Dhs334m), it should remain so in 2008.

NBQ was established in 1982 by the ruler of Umm Al-Qaiwain and remains 30%-owned by that emirate's government. The bank operates only in the UAE through a domestic network of 15 branches and 29 ATMs. Further licences have been granted to open another 15 UAE branches. The recent focus has been wholesale banking (85% of lending), however, retail will grow in the future. NBQ is also active in trade finance and will increasingly offer Islamic banking products through an agreement with National Commercial Bank, the largest Saudi bank.