Capital Intelligence downgrades Emirates Bank International and National Bank of Dubai

The financial strength rating has been reduced to A. The slowing domestic economy and the collapse of the real estate market in Dubai have increased credit risks. Non-performing loans (NPLs) are likely to rise this year.

However, the bank's strong capital and good operating profitability are mitigating factors. All ratings carry a Stable outlook. Individual ratings will continue to be assigned to both banks until the legal integration of EBI and NBD is completed. The two banks currently function as fully-owned subsidiaries of the holding company Emirates NBD (ENBD).

ENBD recorded strong growth in net interest income, fees, commissions and foreign exchange profits in 2008 on the back of substantial increases in business volumes.

However, increased impairment and mark-to-market losses led to a decline in return on average assets (ROAA). Although net profit declined in the first nine months of the current year over the corresponding period of the previous year due to lower non-interest revenues and higher provision charges, key profitability ratios were better than in the full year 2008. Net interest income grew strongly and the cost/income ratio improved this year.

Asset quality ratios weakened last year owing to an increase in NPLs. The provision coverage ratio also fell. On the plus side, new equity capital was received from the Dubai government this year and Tier II capital increased after the bank opted to convert federal government deposits that it has received towards end 2008 into subordinated debt. The CAR rose to a strong 19.9% at end-September 2009, providing a cushion against future increases in bad loans. The bank is also profitable enough to absorb higher loan-loss provisions should NPLs rise further this year.

Liquidity ratios tightened towards end-2008, but improved slightly at end-September 2009 due to a sizeable increase in customer deposits.

Short-term interbank liabilities declined. The UAE governmentintends to provide guarantees to local banks that plan to borrow from the domestic and international markets.

ENBD is likely to raise funds through this route later this year. The funds will partly replace medium-term liabilities maturing over the next 12 months.

With total assets of over $76bn, ENBD is currently the largest banking group in the Middle East and North Africa region. In the UAE, it has a 20% share of assets and a 19% share of customer deposits, making it an important player in the financial market.

ENBD's 129 branches at end-June 2009 represent a fifth of total bank branches in the country. The government of Dubai, through the Investment Corporation of Dubai, is the single largest shareholder of ENBD with a 55.6% stake.