Capital Intelligence affirms CBD's foreign currency and financial strength ratings

The ratings are strongly underpinned by government support, which is very likely in case of need.

The financial strength rating is maintained at A- in view of the bank's good overall financials, particularly asset quality and profitability, and the increase in capital this year. However, a slowing domestic economy has produced considerable uncertainties in the real estate and construction sectors in Dubai, to which CBD is exposed through mortgage loans and construction finance.

In addition, the bank has a large portfolio of loans extended to high net worth individuals which may have been invested in the real estate sector. In view of these reasons, the outlook for the financial strength rating is 'Negative'.

Commercial Bank of Dubai's net profit fell in 2008 due to impairment losses on its equity holdings. However, strong growth in net interest income, fees, commissions and foreign exchange profits coupled with good operating cost efficiencies ensured a relatively good return on average assets (ROAA).

The bank's historically low funding cost contributes to its wide interest spreads and overall good profitability. CBD's diversification into retail banking and the expansion of its product range in recent years have strengthened its core income base.

Non-performing loans are very low. The provision coverage ratio was raised to near full provisioning at end-March 2009. The bank is profitable enough to make sizeable additional provisions if required this year. There are exposures to the real estate sector through construction, mortgage and possibly personal loans to high net worth individuals which could be impacted by the ongoing problems in Dubai.

A sustained downturn could strain the finances of CBD's borrowers. However, the bank's principal exposure is to the trading sector, which is relatively less affected. The bank has no exposure to two Saudi business groups that are currently not servicing their sizeable debts. The capital adequacy ratio had fallen at end 2008, but is expected to rise substantially (to around 18.4%) after the conversion of federal government deposits to Tier 2 debt this year.

With total assets of $9.7bn at end 2008, CBD is a medium-sized bank in the UAE. The bank was established as a public limited company in 1969. It is one of the oldest local banks in the country. The Dubai government currently has a 20% stake while the remaining shares are held by prominent Dubai-based business groups, the majority being well-known, long-established and very wealthy businessmen. CBD is primarily a corporate bank with a strong trade finance business and growing retail banking and wealth management activities.