Fitch affirms National Bank of Abu Dhabi at 'AA-'; Outlook stable

NBAD's IDRs and Support rating reflect Fitch's view that there is an extremely high probability that it would receive support from the UAE authorities, if required. This is based on the UAE authorities' strong history of providing support to local banks, NBAD's importance to the UAE banking system and its 70.5% ownership by the Abu Dhabi Investment Council, the domestic investment arm of the Abu Dhabi government.

NBAD's Individual rating reflects its good franchise, close links to the Abu Dhabi government, and sound performance, asset quality and capitalisation. It also reflects concentrations in loans and deposits, substantial exposure to property and share financing, and risks inherent in the UAE operating environment.

Operating profits rose a robust 57% in H108 yoy, driven by rapid loan growth (H108: 34%, 2007: 39%) with broadly stable margins, healthy growth in fee income, satisfactory cost efficiency (H108: cost/income ratio 25%) and modest impairment charges. Asset quality is strong, with end-H108 impaired loans a low 0.8% of gross loans with adequate reserves coverage. Government and public sector lending was a substantial 32% of end-H108 gross loans. However, asset quality ratios are flattered by rapid recent loan growth which may lead to weakened asset quality through the cycle, particularly in untested markets such as retail and property lending. NBAD has substantial real estate (end-H108: 12% of loans) and share financing (11%), which requires close monitoring. Market risks are moderate.

Funding is mainly from customer deposits; this includes large, stable, public sector deposits. Wholesale funding is from the interbank market as well as a $5bn EMTN programme (end-H108: $2bn outstanding), subordinated convertible notes (end-H108: Dhs3bn) and syndicated loans. NBAD's liquidity tightened in H108 but remains satisfactory. The global credit crisis has resulted in somewhat weakened liquidity in the UAE banking system and this is likely to negatively impact the cost of funds and growth prospects of most UAE banks. NBAD's capital ratios were maintained at satisfactory levels following additional capital from the Q108 conversion of Dhs1.4bn convertible notes. Its Fitch eligible capital ratio was 11.6% at end-H108.

Established in 1968, NBAD is the second-largest bank in the UAE by assets. At end-H108, it held around 12% of UAE banking system assets. NBAD offers a broad range of corporate and retail banking services, mainly in the UAE but also in major international financial centres and Egypt.

A report on this entity will be available shortly on the agency's subscription website, under Financial Institutions/ Banks/ Full Rating Reports.