Capital Intelligence affirms National Bank of Umm Al Qaiwain's ratings

The ratings are underpinned by its ownership by the government of Umm Al Qaiwain. The financial strength rating is maintained at BBB reflecting good profitability, sound asset quality and strong capital adequacy.

The bank's moderately high exposure to the real estate and construction sectors in the country and the current uncertainties in the slowing domestic economy are constraining factors. In view of the bank's good H1 2009 performance and its strong capacity to make high provisions if required over the coming quarters, CI has assigned a 'Stable' outlook to all the ratings.

NBQ has expanded its businesses and assets substantially over the last few years following the implementation of growth oriented strategies and a substantial increase in capital. Net profit declined in 2008 (owing to mark-to-market losses on the trading portfolio), but return on assets was strong. The substantial growth in lending, a wider interest differential and higher fee and commission earnings contributed to NBQ's overall good operating profitability last year.

Asset quality ratios remained strong despite an increase in non-performing loans (NPLs) in H1 2009.

NPLs represented a low percentage of gross loans and were fully covered by loan-loss reserves. The bank has moderately high levels of real estate and construction loans, but has no exposure to Dubai's freehold properties which experienced the sharpest falls in property prices and rentals in the UAE in recent months. A slowing domestic economy and falling property prices and rentals all over the country could lead to higher NPLs over the coming quarters. However, NBQ's high loan-loss reserves and its strong capital base are considerable safeguards. The bank is also profitable enough to absorb substantially higher provision charges.

Liquidity ratios had weakened considerably at end 2008, but a successful customer deposit collection drive in H1 2009 and conscious efforts to rebuild the liquid asset base strengthened key ratios to satisfactory levels at end June 2009.

The Bank is strongly capitalised. Capital will rise further after formal documentation formalities are completed for the conversion of federal government deposits received last year under the government's liquidity support programme for the banking sector into Tier 2 funds.

NBQ was established in 1982 by the ruler of Umm Al Qaiwain, a small emirate in the northern part of the UAE with limited natural resources and largely dependent on federal support. Its principal shareholders are the government of UAQ (30%), and major UAE-based business groups. The bank provides a range of corporate, commercial and retail banking activities. Its activities are primarily UAE based and the bank has no physical presence outside the country.