Moody's assigns A3/P-2/D first-time ratings to Dubai Bank; outlook positive

The rating outlook is positive. The ratings reflect the bank's robust risk management, its small but fast-growing franchise and its sound financial fundamentals.

Since its establishment in 2002, Dubai Bank started implementing a retail banking model, then changed to an investment banking model and has now settled successfully into an Islamic banking model.

Established by Emaar Properties LLC, its 100% ownership now rests with the Dubai Banking Group, with the majority ownership vested in Dubai Holdings LLC, a company owned by the ruler of the Emirate of Dubai in the United Arab Emirates (UAE) and closely associated with the government of Dubai.

Dubai Bank is currently the 23rd largest bank in the UAE in terms of assets. The bank launched its accelerated growth strategy in 2007, on the platform of the tangible support of its shareholders, the Dubai ruling family, and its Islamic and ethical banking business model.

The D BFSR -- which maps to a baseline credit assessment of Ba2 -- reflects the bank's strong financial fundamentals, which are underpinned by its large capital base, sound asset quality, good liquidity and efficient control over its costs. It demonstrates a marked leaning towards its corporate clientele for its asset and liability business.

However, the BFSR also takes account of Moody's view that, while these activities have been the key driver of the bank's robust performance, they have also led to material credit concentrations and related-party exposures, which the bank is working to reduce.

Dubai Bank has capitalised on its strong association with the government of Dubai and quasi-government corporates to gain lucrative retail business, while the retail banking franchise is a growing portfolio within the bank's assets.

In this context, the bank's income has been generated by business booked primarily by the corporate finance and treasury & investment divisions, with retail trailing both of these. Going forward, Moody's expects that spreads, while currently adequate, will improve thanks to the growing retail profit and fee business it will generate.

While the robust credit growth and reliance on the corporate market exposes the bank to greater credit risk, at present credit quality is good and the few delinquent loans have been fully provided for.

However, the growing competition in the local banking sector and the overheating property market both pose challenges and could adversely affect credit quality and profitability, which have been improving, underpinned by rapid loan growth and good credit spreads.

Moody's assesses the probability of systemic support for Dubai Bank from the authorities in the UAE and from the main shareholders -- members of the emirate's ruling family -- as very high. Therefore, the bank's local and foreign currency deposit ratings are set at A3/Prime-2 -- a five-notch uplift from its baseline credit assessment of Ba2, which is the measure of its standalone financial strength derived from the BFSR.

The outlook on all of Dubai Bank's ratings is currently positive. This reflects our expectations that the bank's BFSR would benefit from (a) significant expansion, along with further operating diversification, more robust franchise in an increasingly competitive operating environment, while maintaining an acceptable risk profile, and (b) a still strong financial performance, and gradual reduction in its related-party exposures, financing as well as deposit concentration. However, the BFSR could be lowered, or the outlook changed back to stable, in the event of (a) a sharp decline in earning power and profitability, (b) an increase in non-performing assets, and/or (c) Dubai Holdings ceasing to be its major shareholder.

Dubai Bank is headquartered in Dubai, United Arab Emirates and reported total assets of Dhs15.8bn ($4.3bn) at 30 June 2008.