Capital Intelligence (CI), the international credit rating agency, announced that it has maintained the Financial Strength Rating of the UAE’s National Bank of Umm Al Qaiwain (NBQ) at ‘BBB’ reflecting the Bank’s very strong capital adequacy ratio (CAR), liquidity and profitability.
Weak asset quality is a major constraining factor, along with customer concentrations in loans and deposits, the small balance sheet size, and the continuing high credit risks in an otherwise improving operating environment.
The Bank’s Foreign Currency Ratings (FCRs) are affirmed at ‘BBB+’ Long-Term and ‘A2’ Short-Term. The Bank’s access to federal government support underpins its FCRs. The Support Rating is maintained at ‘2’ denoting a very high likelihood of official support in case of need. A ‘Stable’ Outlook is appended to all the ratings.
NBQ’s asset quality ratios had weakened in the aftermath of the 2008 global financial crisis and the non-performing loan (NPL) ratio remains high; however, there have been no major increases in NPLs in recent periods. The loan-loss reserve coverage ratio strengthened last year, but remains low. Capital provides a further cushion and the effective NPL coverage ratio is at a good level.
The Bank’s CAR remains strong and is the best among UAE banks. With capital accounting for a large portion of the balance sheet, the leverage ratio is low. NBQ’s Tier 1 ratio is also very high. Capital is sufficient to support a sizeable increase in risk assets, although no such growth has been planned as the Bank continues to maintain a cautious outlook.
The Bank also has strong liquidity ratios. Customer deposits and capital continue to be the primary sources of funding; short-term interbank liabilities are negligible and there are no medium/long-term borrowings on the balance sheet. Liquid assets are high. Customer deposits have a sizeable medium-term component, as a result of which asset/liability mismatches are very low.
NBQ’s profitability ratios continue to be strong and are better than peer group average owing mainly to its wide margins (reflecting a low funding cost) and relatively small operating cost base. However, both the operating and net profitability ratios have fallen in recent periods owing to reduced investment income and higher provisions. The Bank’s net profit received a substantial boost in H1 2015 when its long-standing dispute with Global Investment House was settled in April 2015. However, operating profit remained flat and net profit excluding extraordinary income showed a decline. Net interest income and fee and commission income, which had grown strongly in 2014, rose at a moderately low pace in H1 2015.
NBQ, with total assets of AED12.6 billion at end-June 2015, is one of the UAE’s smaller commercial banks. It is primarily a corporate banking institution and its client base consists mainly of small and medium-enterprises operating in the real estate, construction, trade and services sectors. The Bank also has a moderate sized retail banking base and it offers the full suite of products for this segment. The Bank is owned 30% by the government of Umm al Qaiwain.