Fitch affirms National Bank of Ras Al-Khaimah at 'A-'/'F2'; Outlook stable

The Support Rating Floor is affirmed at 'A-' (A minus). The Outlook for the Long-term IDR is Stable. Rakbank's IDRs and Support rating reflect Fitch's view that there is an extremely high probability of support from the UAE authorities. The government of Ras Al-Khaimah holds a majority stake in Rakbank and there is a strong history of support being provided by the authorities to banks in the UAE. The Individual Rating reflects Rakbank's good performance and satisfactory asset quality and capitalisation. It also reflects the bank's high cost base (being a predominantly niche player in retail banking), modest size, substantial exposure to the local residential mortgage market and reliance on a relatively small and undiversified operating environment.

Profitability is healthy, with operating income increasing by a robust 65% yoy in 9M08. This was driven by rapid loan growth (27% in the nine months to end-September 2008), mainly from the bank's core business of retail lending, and growth in fee income. Rakbank's net interest margin (9M08: 7.9%) is stronger than that of its peers, reflecting the wider margins that can be charged in the retail sector. However, growth is likely to slow in Q408 and 2009 as the global credit crisis results in higher funding costs and increasing competition for local customer deposits curbs growth in lending.

Asset quality ratios are satisfactory and continue to improve, benefiting from write-offs in the credit cards and personal loans. Rapid loan growth also flatters asset quality measures. Delinquencies in the mortgage portfolio are relatively small but this market is untested. The mortgage portfolio is concentrated in Dubai and gives the bank a large exposure to a potential bubble within this market. However, Fitch understands that the average LTV at origination for the mortgage book is 75% (average LTV at current prices is 48%) and more than half of lending is to residential owner-occupiers.

Liquidity is adequate, with loans at 76% of assets and a loans/deposits ratio, as calculated by Fitch, of 112% at end-September 2008. Funding is mainly through customer deposits, which made up more than 80% of non-equity funding. Rakbank's $500m EMTN programme ($448m outstanding at end-Q308) has improved the diversification and maturity profile of funding. The UAE authorities' recent measures to support liquidity in the local banking system give additional comfort. Capital is satisfactory, with a Fitch Ratings eligible capital ratio of 17.5% at end-September 2008. Capital ratios should slightly increase under Basel II.

Rakbank was established in 1976 with the government of Ras Al-Khaimah as the majority shareholder (52.75%). The bank has 25 branches and 61 ATMs located throughout the UAE. With a focus on retail banking, it provides personal loans, mortgages, current and savings accounts and credit cards. It is also active in commercial banking and trade finance.