Capital Intelligence (CI), the international credit rating agency, announced that it has changed the Outlook on the Financial Strength Rating (FSR) of the UAE’s Bank of Sharjah (BOS) to ‘Positive’ from ‘Stable’ in view of the improvement in the non-performing loans (NPL) ratio in H1 2015 and the expectation of increased profitability and reduced share of low-rated risk overseas.
The Bank’s capable management, strong capital adequacy ratio, good liquidity, full loan-loss coverage ratio and reasonably good operating profitability underpin its FSR, which is affirmed at ‘BBB+’.
BOS’s high customer concentrations in loans and investments, high related-party exposures and the exposure to low-rated risks overseas through its subsidiary are major constraining factors.
The Foreign Currency (FC) Ratings are affirmed at ‘A-’ Long-Term and ‘A2’ Short-Term; the ratings are underpinned by the support of the federal government and the Bank’s overall good financial fundamentals. The Support Rating is ‘2’ in view of the Bank’s ownership by the Sharjah government and the strong likelihood that the UAE government would provide assistance in case of need. The Outlook for the FC Ratings is ‘Stable’.
BOS has not changed its basic business model and it primarily continues to work with its core customer base, which is benefiting from the upturn in the economy. The credit book is concentrated in the trading, services and manufacturing sectors. For years its asset quality ratios had been among the best in the banking industry, but the NPL ratio had weakened in 2013 following difficulties experienced by a few of its customers operating in the trading and services sectors. The NPL ratio fell in H1 2015 following upgrades of customer accounts, and further improvements are expected by year end. The Bank has made substantial provisions, and loan-loss reserves continue to exceed NPLs.
The Bank’s capital provides an additional cushion against future shocks. BOS continues to have significant customer concentrations in its loan book, but exposures are largely short-term in nature. Related party exposures are high, though levels are declining in line with regulatory requirements. BOS continues to be very strongly capitalised with a high Tier 1 ratio and low leverage.
The Bank continues to maintain very strong liquidity ratios underscoring management’s conservative outlook. Customer deposits and capital account for the bulk of the Bank’s funding, and short-term interbank liabilities are low. There is no undue customer concentration in the deposit base, unlike most of the Bank’s peers. Maturity mismatches are also at manageable levels.
The Bank continues to be profitable and key ratios are satisfactory. Although some profitability ratios had weakened in 2014, there was a good improvement in H1 2015 owing to strong growth in net interest and non-interest income, which was underpinned by higher business volumes and a wider net interest margin. Both operating and net profit recorded strong increases in H1 2015. The Bank has a high funding cost which, along with the large stock of liquid assets on the balance sheet, has resulted in low margins compared with the peer group average.
BOS is primarily a corporate bank with a customer base comprising local conglomerates. The Bank is essentially a niche player in the corporate banking and trade finance segments of the market. It lends primarily to medium and large-sized UAE-based companies. BOS operates a small network of branches in the UAE. It has a presence in Lebanon through its majority stake in Emirates Lebanon Bank. The government of Sharjah owns 16% of the Bank’s capital. Other major shareholders are prominent UAE businessmen. With total assets of nearly AED24 billion at end 2014, the Bank ranks among the small-to-medium sized entities in the country.