Sharjah Islamic Bank outlook revised to pos on capital increase, good financial performance

At the same time, Standard & Poor's affirmed its 'BBB' long-term and 'A-2' short-term counterparty credit ratings on the bank.

"The positive outlook reflects our expectations that SIB will maintain its good financial profile and benefit from its close relationships with the government of Sharjah," said Standard & Poor's credit analyst Mohamed Damak.

The ratings on SIB reflect its strong capitalization, good financial performance, and ownership structure that is dominated by the government of the Emirate of Sharjah (not rated).

Offsetting these positive factors are the bank's small size, high lending concentration, and rapid growth in loans untested by a sharp economic downturn.

The long-term rating on SIB is one notch higher than the bank's stand-alone credit quality. This reflects Standard & Poor's expectation that the Sharjah government--which owns 30.7% of SIB--would provide support if needed.

Given its strong relationship with the government, SIB appears to be the flagship bank of the emirate.

SIB is classified as a government-related entity (GRE) under our methodology.

With total assets of United Arab Emirates dirham Dhs13.7bn on March 31, 2008, SIB is a small bank by regional standards.

The bank displays a good financial performance despite mounting competition in the UAE and the costs attached to its distribution network and business expansion.

These costs are set to continue weighing on SIB's financial performance in the next few years.

On a positive note, business expansion outside Sharjah is likely to support revenue diversification and reduce concentration risks.

The bank's asset quality is adequate; excluding old nonperforming loans, asset quality indicators are strong.

We could raise the ratings if the bank succeeds in strengthening its business profile, including through diversifying and reducing concentration risks--with no significant deterioration in capital and financial performance.

We could revise the outlook back to stable or lower the ratings if profitability or capitalization deteriorate significantly, expansion is more aggressive than what we had expected, or links with the government weaken.