Capital Intelligence affirms Bank of Sharjah's ratings

The ratings are underpinned by the support extended by the federal government to the banking sector.

The financial strength rating is maintained at BBB+ and reflects the bank's good management, strong capital adequacy, sound asset quality and good profitability. All ratings carry a 'Stable' outlook.

BOS has delivered consistently strong results for several years. Although there was only a marginal increase in net profit in 2008 due to higher impairment charges for loans and investments and lower investment related income, key profitability ratios remained strong underpinned by low operating cost, good net interest earnings (partly attributed to a low funding cost) and high non-interest revenues. The bank raised substantial capital last year, which supported the growth in risk weighted assets. Consequently, the capital adequacy ratio remained strong at end 2008 and at the end of Q1 2009.

The acquisition of BNP Paribas' Lebanese operations by the bank's newly established subsidiary in that country led to an increase in non-performing loans (NPLs). However, the NPLs to gross loans ratio was still sound and NPLs were fully provided by end March 2009. The Lebanese subsidiary is expected to make a good contribution to earnings this year. The business is profitable with a business model similar to the bank's domestic operations. BOS preferred to stay away from lending to the real estate sector and consequently it has no direct credit exposures to this sector at present.

The bank also has a relatively high level of short-term loans on its books reflecting its traditional focus on financing working capital requirements of corporate groups in the country. The present economic slowdown could affect asset quality over the next several quarters, but the bank's good provisioning, high capital base and strong profitability are expected to cushion the impact.

Liquidity ratios tightened at end 2008 and end March 2009 due to strained conditions in the financial markets, but key ratios were still at acceptable (though borderline) levels. The bank's low maturity mismatch position is a mitigating factor here. Historically, BOS' liquidity ratios have been strong underscoring management's commitment to ensuring a liquid balance sheet at all times. Key ratios are expected to strengthen over the next few quarters.

The bank was incorporated in 1973 as the emirate of Sharjah's first bank. The principal shareholders currently are the government of Sharjah and members of the ruling family (30% at end March 2009).

BOS is primarily a corporate banking institution with a strong trade finance focus. Most of its customer relationships are long standing. BOS lends primarily to medium and large UAE-based companies. It typically provides short-term working capital finance and has limited long-term credit exposures. BOS has participated in new projects as both banker and investor. The bank had largely stayed away from the booming real estate market, preferring to watch and wait for the market to mature.