Fitch affirms Bank of Sharjah at 'A-'; Outlook Stable

BOS's IDRs and Support rating reflect the extremely high probability that the bank would receive financial support from the UAE authorities, if required. This is based on the strong history of support provided to UAE banks by the authorities, and the Sharjah government and ruling family's 30% stake in BOS. The Individual rating reflects its strong capitalisation and satisfactory profitability, asset quality and liquidity. It also reflects its modest franchise, substantial exposure to regional equities markets, some concentration in lending and funding, and potential political and execution risks arising from an expected acquisition in Lebanon.

In Q208, BOS announced the expected acquisition of 81% of Banque Nationale de Paris Intercontinentale (BNPI) from BNP Paribas, which consists of 5 Lebanese branches active in corporate banking. Operating in Lebanon ('B-'/Stable) would materially impact BOS's risk profile. Nevertheless, BNPI has an established franchise, good asset quality, and is supported by substantial additional capital from BOS's convertible bond.

Healthy growth in operating profits of 45% in 2007 was driven by rising net interest income from rapid loan growth (2007: 41%) with improved margins, well controlled costs (2007: cost/income ratio 17%), and low impairment charges. However, performance can be volatile due to significant exposure to regional equity markets from a portfolio of medium-term equity investments (end-2007: 10% of assets).

Impaired loans were 1.3% of gross loans at end-2007 with 104% reserves coverage. Liquidity is supported by substantial cash and Central Bank of the UAE certificates of deposit. Funding is mainly from customer deposits. The bank's Fitch eligible capital ratio fell in 2007 to 24% at the year-end (end-2006: 30%) but Dhs1.5bn additional capital received in March 2008 from its convertible bond should comfortably support medium-term growth and the Lebanese acquisition.

Established in 1973, BOS is one of four banks incorporated in Sharjah. At end-2007, it had a modest 0.9% of UAE banking system assets. Focused on corporate banking, activities include project finance, structured and IPO lending, and SME banking. It operates through four UAE branches and is likely to begin operating in Lebanon in Q208 following the expected acquisition of BNPI.