Fitch affirms HSBC Bank Middle East at 'AA-'; outlook stable

HBME's IDRs and Support rating reflect the extremely high probability that the bank would be supported by its parent, HSBC Holdings plc (rated 'AA'/'F1+'/Stable Outlook), in case of need.

The Individual rating reflects the strength of its regional franchise, its consistent profitability, sound asset quality, liquidity and capitalisation, as well as the benefits of being part of the HSBC Group where HBME has access to group-wide treasury and risk management systems and expertise. The Individual rating also reflects reliance on the relatively small UAE market for about two-thirds of its profits.

HBME reported operating profits of USD887m in 2007, a year-on-year increase of 46%, and an operating return on average equity of 43.5%. Strong revenue growth was achieved across all business divisions and in all the bank's main countries of operation.

Growth was driven by rising net interest and fee income as a result of increasing business volumes, modest impairment charges and stable cost-efficiency.

However, future growth and profitability may be impacted by the effects of the global credit crunch on the bank's main markets; the main impact on HBME so far has been the rising cost of funds, with many UAE banks offering increasingly competitive rates to attract customer deposits.

Credit and market risk management is prudent and in line with HSBC Group's policy. Despite rapid loan growth of 37% during 2007, asset quality is sound; impaired loans were a modest 1.5% of gross loans at end-2007 with reserve coverage at a satisfactory 82%.

The bank has little direct exposure to stock markets in the region and regional property exposure is well-controlled. Liquidity is sound, supported by substantial interbank placements and liquid debt securities.

Funding is stable and diversified. Capitalisation is sound, considering HBME's risk profile, with a Fitch eligible capital ratio of 8.5% at end-2007.

HBME is wholly-owned by HSBC Holdings plc. The bank has eight branches in the UAE, as well as branches in Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar and the Palestinian Territories. Business is organised around three principal business groups: commercial banking, global banking and markets, and personal financial services.