National Bank of Umm Al Qaiwain's foreign currency and financial strength ratings affirmed with 'stable' outlooks

The Support Rating of '2', which reflects its access to federal government support and its ownership by the government of Umm Al Qaiwain, underpins these ratings. In view of the continuing strong capital adequacy, good liquidity and high profitability, as well as the slight improvement in asset quality in the first half of 2012, a 'Stable' Outlook is appended to all the ratings.

The Bank continued to maintain a cautious outlook last year with a considerably reduced risk appetite and the focus on conserving liquidity and capital. While this had led to reduced lending volumes and lower off-balance sheet business last year - resulting in a diminished net profit - the Bank's key profitability ratios remained good and were well above the sector average. The Bank's wide margins (reflecting its very low funding cost and its focus on lending to small companies which deliver high returns), its relatively small operating cost base (despite increases in recent periods) and low impairment charges contribute to its strong profitability ratios.

Asset quality ratios had weakened over the last few years owing to the economic slowdown and the associated problems in the trade, real estate and construction sectors. The increase in the non-performing loans (NPLs) to gross loans ratio was also partly due to the contraction of the loan portfolio. NBQ's coverage ratio declined last year and is low even compared to the sector average. However, the Bank's large capital base, solid capital adequacy ratio and the substantial collateral that it holds against impaired loans coupled with a good track record of recovering loans are mitigating factors. Moreover the Bank's good operating profitability can absorb higher impairment charges should this become necessary. NBQ's net loans to stable funds ratio continued to be comfortable at end 2011. Lower than peer group maturity gaps, relatively low concentrations in the customer deposit base and a high level of medium-term customer deposits are some of the positive characteristics of the Bank's funds base.

NBQ, with total assets of Dhs11.7bn at end-June 2012, is one of UAE's smaller commercial banks. NBQ's principal markets within the UAE are in the emirates of Dubai, Abu Dhabi and Sharjah. The Bank provides working capital loans, trade finance, project finance and syndicated loans as well as retail loans. Corporate and commercial banking activities make a major contribution to NBQ's asset book. The Bank is owned 30% by the government of Umm al Qaiwain.