Capital Intelligence affirms Commercial Bank International's foreign currency ratings

The ratings are underpinned by the likelihood of support from the federal government and from major shareholder Qatar National Bank (QNB) in case of need. The support rating has been raised to 3 from 4, reflecting the shareholding by QNB.

The financial strength rating has been reduced to BB from BB+ in view of the deterioration in asset quality in H1 2009. The slowing local economy has increased credit risks, and higher provisioning requirements are likely to impact future earnings.

However, there are plans to increase capital, which could provide some cushion against external shocks. The outlook for the financial strength rating is Stable. Commercial Bank International has had frequent changes in management over the last ten years.

Although strategies were laid down some years ago outlining its transformation into a modern-day commercial bank, CBI has yet to realise its full potential. A new CEO and new heads for major business groups were appointed over the last year. Credit underwriting standards have improved. New branding and corporate identity campaigns have been launched, the product range has been widened and the IT area is being substantially strengthened.

Unfortunately, CBI's transformation has coincided with the downturn in the local economy, presenting the new management with serious challenges. One of the main problems facing the bank is the deterioration in asset quality this year. Non-performing loans (NPLs) have increased. While the capital adequacy ratio strengthened at end June 2009, capital remains impaired by a high level of unprovided NPLs. CBI's profitability ratios declined in H1 2009 due to high loan-loss provision charges. Net profit could come under further strain in the second half of the year, particularly if NPLs rise.

Liquidity had deteriorated towards end 2008 with the contraction of customer deposits, reflecting the tight conditions in the financial markets at that time. However, the bank was able to raise a considerable amount of interbank funds. CBI also received deposits from the federal government under its liquidity support programme for the banking sector.

CBI is one of the UAE's smaller local banks, with total assets of $10.9bn at end 2008. QNB acquired a 16.5% stake in CBI last year and has two seats on the board as well as representation on the executive committee, audit committee and advances committee. QNB provides support in the treasury area. CBI has not entered into a management agreement with QNB.

CBI is primarily a corporate bank with a growing retail banking business. Trade finance continues to be its mainstay and customers are still mainly small and medium-sized companies. The bank is expanding its corporate banking business to include larger companies and public-sector entities. Treasury activities are being substantially upgraded. The bank operates a brokerage subsidiary.